REGRESSION

REGRESSION

Converts data clumps into comprehensible information.

Understanding the impact of

the INDEPENDENT CAUSAL VARIABLE (X) on
the concerned DEPENDENT AFFECTED VARIABLE (Y).

All economic phenomena has to be understood in terms of

a set of CAUSAL VARIABLES (X1, X2, X3, …, XN)
impacting the DEPENDENT VARIABLE (Y).
 Regression (contd.)

INDEPENDENT VARIABLE (X) DEPENDENT VARIABLE (Y)

PREDETERMINED Variable DETERMINED Variable

It serves as: It serves as:

the CAUSE the EFFECT

or the STIMULANT or the CONSEQUENCE

Y is also called a STOCHASTIC Variable since ....

 Regression (contd.)
Functional relationships b/w the 2 variables can be expressed as:

Y = f (X)
This functional relationship could either be:

Positive / Direct: Negative / Indirect / Inverse:

X Y X Y

X Y X Y
 Regression (contd.)

Comprehensible data informs us about this sort of variational

relationship between X & Y

Positive or Direct relationship:

The slope of the line is positive in value
and so the curve is UPWARD SLOPING

Negative or Indirect or Inverse relationship:

The slope of the line is negative in value
and so the curve is DOWNWARD SLOPING
 Regression (contd.)

Y
= Positive Slope
= EFFECT

= Negative Slope

X = CAUSE
 Regression (contd.)

Unorganised / Organised data can be converted into an equation,

which will indicate the curve’s:
TRAJECTORY, and
VALUE OF THE SLOPE

Regression converts data into a LINEAR equation:

Y = mX + h

Y = h + mX

Significance of ‘h’ ???

 Regression (contd.)

Econometrics,
NOTATIONALLY and NOT CONCEPTUALLY changes this
LINEAR equation to:

 
PRF

 
SRF
 Regression (contd.)

X Y

1 17 -2 -3 6 4 21 -4 16 9

2 20 -1 0 0 1 20.5 -0.5 0.25 0

3 27 0 7 0 0 20 7 49 49

4 23 1 3 3 1 19.5 3.5 12.25 9

5 13 2 -7 -14 4 19 -6 36 49

15 100 -5 10 113.5 116

   
 
 
 
 Regression (contd.)

Y
 

3
X
1 2 4 5
 Regression (contd.)
(R2) Coefficient of Determination of Goodness of Fit
 

     

   
 

For the given data R2 = 0.02 or 2%

Hence, X cannot explain 98 % of Y’s behaviour

 Regression (contd.)
 
X Y

10 06 -22 -16 352 484 256

21 31 -11 9 -99 121 81  

32 21 0 -1 0 0 1
 
45 12 13 -10 -130 169 100
 
52 40 20 18 360 400 324
1174
160 110 483 762

   
 
 
 
REGRESSION and ELASTCITY
 Regression and Elasticity of Y on X

Y hat = 92 + 2.67X eYX = ? X = 70, e1 = 0.337 e2=0.67

 Regression and Elasticity of Y on X

Y  
 

     

 
 

 
RIE
RE
A
B
 

X
 Regression and Elasticity of Y on X

Y RE

  RIE

 
 
   
   

X
Y

 
 

X
CONCAVITY and CONVEXITY

INFLEXION
 Concave to X-Axis Downwards Convex to X-Axis Downwards

Y Y
For more of X we give up For more of X we give up
more & more of Y Less & less of Y
 
 
 
 
 
 
 
   
 
 

X X
 Concave to X-Axis Upwards Convex to X-Axis Upwards

Y Y For more of X we get

For more of X we get
less & less addition of Y more & more addition of Y
 
 
   
 
 
 
 
 
 
 
 
 
 

X
X
 Convex to X-Axis Upwards Convex to X-Axis Downwards

Y Y

For more of X we get For more of X we give

more & more of Y   up
less & less of Y
 
 
 
 
 
   
   
 
 
 

X X
 Concave to X-Axis Upwards Concave to X-Axis Downwards

Y For more of X we get Y For more of X we give up

more & more of Y
less & less increment in Y
   
 
   
 
   
 
 
 

X X
A 6 B 4 C 2
A 6 C 2

Points of INFLEXION C 2

B 4
Model 3 A 6

Model 4 Model 5 Model 6 B 4

D
A 6 C 2

E G Model 1 Model 2
H

No INFLEXION Points
Model 7 Model 8
F