INDEPENDENT AND DEPENDENT VARIABLES

Simple regression involves only two variables; one variable is predicted by another variable.

The variable to be predicted is called the dependent variable. The predictor is called the
independent variable, or explanatory variable. For example, when we are trying to predict
the demand for television sets on the basis of population growth, we are using the demand for
television sets as the dependent variable and the population growth as the independent or
predictor variable.

The decision, as to which variable is which sometimes, causes problems. Often the choice is
obvious, as in case of demand for television sets and population growth because it would
make no
sense to suggest that population
growth
could be dependent on TV
demand!
The population growth has to be
the
independent variable and the TV
demand
the dependent variable

If we are
might be

unsure, here are some points that

of use:

if we

have control over one of the

variables then that is the
independent. For example, a manufacturer can decide how much to spend on advertising
and expect his sales to be dependent upon how much he spends

If there is any lapse of time between the two variables being measured, then the latter must
depend upon the former, it cannot be the other way round

if we want to predict the values of one variable from your knowledge of the other variable,
the variable to be predicted must be dependent on the known one

ASSUMPTION OF LINEAR REGRESSION MODEL

1.
2.
3.
4.
5.
6.
7.
8.
9.

Linear function form

Fixed Independent variables
Independent Observations
Representative samples and proper specification of the model.
Normality of residuals or errors
Equality of variance of the errors (homogeneity of residual variance)
No multicolinearity
No autocorrelation of the errors
No outliner distortion
The Three major assumption of regression are listed:
Assumption of Regression
1. Normality of Error
2. Homoscedasticity
3. Independence of errors

The first assumption, normality, requires that the error around the line of regression be
normally distributed at each value of X. Like the t test and the ANOVA F test ,
regression analysis is fairly robust against departures from the normality assumption. As long
as the distribution of the errors around the lines of regression at each level of X is not

extremely different from a normal distribution, inferences about the line of regression and the
regression coefficients will not be seriously affected.
the second assumption, homoscedasticity, requires that the variation around the line of
regression be constant for all values of X. This means that the error vary the same amount
when X is a low values as when X is a high value . The homoscedasticity assumption is
important for using the least-squares method of determining the regression coefficients. If
there are serious departures from this assumption, either data transformations or weighted
least- squares method can be applied.
The third assumption, independence of errors, requires that the errors around the regression
line be independent for each value of X. This assumption is particularly important when the
data are collected over a period of time. In such situation, the errors for a specific time period
are often correlated with those of the previous time period.

APPLICATIN OF REGRESSION ANALYSIS

Applications of regression analysis exist in almost every field.
In economics, the dependent variable might be a family's consumption expenditure and the
independent variables might be the family's income, number of children in the family, and
other factors that would affect the family's consumption patterns. In political science, the
dependent variable might be a state's level of welfare spending and the independent variables
measures of public opinion and institutional variables that would cause the state to have
higher or lower levels of welfare spending.
In sociology, the dependent variable might be a measure of the social status of various
occupations and the independent variables characteristics of the occupations (pay,
qualifications, etc.).
In psychology, the dependent variable might be individual's racial tolerance as measured on a
standard scale and with indicators of social background as independent variables.
In education, the dependent variable might be a student's score on an achievement test and the
independent variables characteristics of the student's family, teachers, or school.

in business

1. measuring the impact on a corporations profits of an increase in profits.

2. Understanding how sensitive a corporations sales are to changes in advertising

expenditures.
3. Seeing how a stock price is affected by changes in interest rates.
4. To forecast the future demand for a companys products.
5. Due to extreme complexity of regression analysis it is often implemented through the use
of specialized calculators or spreadsheet programs.

REFERENCES

BUSSINESS STATISTICS BY S.P. GUPTA AND M.P. GUPTA

BUSINESS STATISTICS A FIRST COURSE BY LEVINE , KREHBIEL, BERENSON

AN INTRODUCTION TO BUSINESS STATISTICS SURINDER KUNDU

TAMILNADU
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