Linear regression is a fundamental concept in statistics and machine learning that allows us

to understand and analyze the relationship between variables. It is a statistical model used to
predict a continuous outcome variable based on one or more independent variables. In
simple terms, linear regression helps us find the best-fitting line that represents the
relationship between the independent and dependent variables. To understand linear
regression, we first need to grasp the concept of a linear model. A linear model assumes that
there is a linear relationship between the independent and dependent variables. This means
that as the independent variable changes, the dependent variable also changes in a linear
fashion. The goal of linear regression is to find the equation of this best-fitting line, which can
then be used to predict the values of the dependent variable for new values of the
independent variable. The equation of a linear regression model is typically represented as y
= mx + b, where y is the dependent variable, x is the independent variable, m is the slope of
the line (representing the change in y for a unit change in x), and b is the y-intercept
(representing the value of y when x is zero). The slope and intercept are determined by
minimizing the sum of squared differences between the observed values of the dependent
variable and the predicted values from the linear model. This process is known as ordinary
least squares regression. Overall, linear regression is a powerful tool for understanding and
predicting the relationship between variables. It provides a simple yet effective way to
quantify the impact of independent variables on a continuous dependent variable. By fitting
a line to the data, linear regression allows us to make predictions and draw conclusions
based on the observed data. It is widely used in various fields, including economics, social
sciences, and machine learning, to analyze data and make informed decisions.

Simplified
Linear regression is a way to see how two things are related to each other.
We use a line to show that relationship, and we find the best line that fits
the data. This line helps us predict what the values will be for different
things. The line is made up of two parts: the slope, which shows how much
the values change together, and the intercept, which tells us what the value
is when one of the things is zero. Linear regression is really helpful in lots of
different areas, like predicting how much money someone will make based
on their education or how much a plant will grow based on how much
sunlight it gets.
Example
Concrete examples:

1. Suppose we have a dataset of housing prices, where the independent

variable is the size of the house (in square feet) and the dependent variable
is the price of the house. Using linear regression, we can find the best-
fitting line that represents the relationship between the size of the house
and its price. This line can then be used to predict the price of a new house
based on its size.

2. In a study analyzing the relationship between cigarette prices

(independent variable) and cigarette consumption (dependent variable),
linear regression can be used to determine the impact of price on
consumption. By fitting a line to the data, we can estimate how much
cigarette consumption changes for a given increase in price.

3. In the field of economics, linear regression can be used to analyze the

relationship between a country's GDP growth (dependent variable) and its
population growth, inflation rate, and government spending (independent
variables). By fitting a line to the data, we can determine the impact of
these independent variables on GDP growth and make predictions about
future economic trends.

4. In machine learning, linear regression is commonly used for predicting

stock prices. By using historical data on various factors such as company
earnings, interest rates, and market trends as independent variables, linear
regression can help determine the most influential factors and their
relationship with stock prices. This information can then be used to predict
future stock prices and make investment decisions.

The sum of squared differences refers to the sum of the squared vertical distances between
the observed values of the dependent variable and the predicted values from the linear
regression model. In other words, it is the sum of the squared errors or residuals, which are
the differences between the actual values of the dependent variable and the predicted
values. By minimizing this sum of squared differences, we can find the best-fitting line that
represents the relationship between the independent and dependent variables.

Predicted values are the estimated values of the dependent variable that are calculated
using the equation of the best-fitting line obtained from the linear regression model. These
values are based on the observed values of the independent variables and allow us to make
predictions for new or unobserved values of the independent variables. The predicted values
are used to understand and analyze the relationship between the variables and can be
compared to the actual observed values to assess the accuracy of the linear regression
model.

Examples of predicted values in linear regression include: - Predicting the future sales of a
product based on historical sales data and other relevant factors such as advertising
expenditure and time of year. - Predicting the housing prices in a particular neighbourhood
based on factors such as the size of the house, number of bedrooms, and location. -
Predicting the GPA of a student based on their SAT scores, high school grades, and
extracurricular activities. - Predicting the stock prices of a company based on factors such as
the company's financial performance, industry trends, and market conditions. - Predicting
the probability of a customer purchasing a particular product based on their demographic
information and past purchase behaviour.

Ordinary least squares regression is a method used in linear regression to determine the
best-fitting line that represents the relationship between the independent and dependent
variables. It calculates the slope and intercept of the line by minimizing the sum of squared
differences between the observed values of the dependent variable and the predicted values
from the linear model. This method aims to find the line that provides the least amount of
error in predicting the dependent variable.