REGRESSION ANALYSIS-NOTES

Regression Analysis:
The Statistical technique of estimating or predicting the unknown value of a dependent
variable from the known value of an independent variable is called Regression analysis.
 Objectives of Regression analysis:
● Describes the nature of relationship in a precise manner by way of regression equation
● Helps in the prediction and forecasting of problems.
● Helps in removing unwanted Variables.

Classification of Regression Analysis: Regression analysis is classified on the basis of

1. Change in proportion
2. Number of variables

1. On the basis of Change in Proportion: On the basis of change in proportionsit is

classified into
i) Linear Regression
ii) Non-linear Regression

i) Linear Regression:
● When dependent variable moves in a fixed proportion of unit movement of
independent variable it is called linear regression
● Linear regression when plotted on a graph forms a straight line.
● When the relationship between X and Y variables are represented mathematically as
Yi = a + bxi+e i. Where a and b known as regression parameters, xi represents the value of
independent variable and yi represents the value of dependent variable, eirepresents
combined effect of all other variables

ii) Non- linear Regression Analysis:

● In non-linear regression analysis the value of dependent variable say ‘y’ does not
change by a constant absolute amount for unit change in the value of independent
variable say, say ‘x’.
● If the data is plotted on a graph, it would form a curve rather than a straight-line.
● It is also called curvi-linear regression.

2. On the basis of Number of Variables: on the basis of number of variables regression analysis
is classified into
i) Simple Regression
ii) Partial Regression
iii) Multiple Regression
i) Simple Regression:
● When only two variables are studied to find regression relationship, it is known as
simple regression analysis.
● One of these variables is treated as independent variable and other as dependent
variable.
● Eg: Functional relationship between price and demand.

ii) Partial Regression:

● When more than two variables are studied in a functional relationship but the
relationship of only two variables are analyzed at a time , keeping the other
variables as constant is called Partial regression analysis.

iii) Multiple Regression:

● When two or more variables are studied and their relationship is studied
simultaneously it is a case of multiple regression.
● Eg: Study of growth in the production of wheat in relation to fertilizers, hybrid seeds,
irrigation etc is an example of multiple regression.

Regression Lines:

The device used for estimating the value of one variable from the value of the other consists
of a line through the points, drawn in such a manner as to represent the average
relationship between the variables. Such lines are called lines of regression.

Methods of drawing Regression Lines:

The Regression lines can be drawn by two methods.

1. Freehand method
2. Method of least squares

1. Freehand method:
● This method is also known as scatter diagram method.
● It is the simple method at the same time crude and very rough and rarely used
method.
● The value of paired observations of the variable are plotted on the graph paper.
● It takes the shape of a scattered diagram scattered over the graphic range of X-axis
and Y-axis.
● The independent variable is taken on the vertical axis
Note:A straight line is drawn through the scattered points on the graph that it confirms
i) It is at the maximum possible nearer to all the points on the graph.
ii) It is at equi-distance of all the points on either sides of the line.
iii) It passes through the center of scattered points.
 2 Method of Least Squares:.
● The line should be drawn through the plotted points in such a way that the sum of the
squares of the deviations of the actual Y values from computed ‘Y’ values is minimum or
least.
● The line fitted by this method is called the line of best fit.
● The line of best fit or the straight line goes through the overall mean of the data.

Application of Regression Analysis in Business:

● Regression is a statistical tool used to understand and quantify the relation between two
or more variables.

● Regressions range from simple models to highly complex equations.

● The two primary uses for regression in business are forecasting and optimization.

● In addition to helping managers predict such things as future demand for their
products, regression analysis helps fine-tune manufacturing and delivery processes.

Regression Analysis Basics:

● Regression analysis is the estimation of the ratio between two variables. Say you want
to estimate the growth in meat sales (MS Growth), based on economic growth (GDP
Growth).
● If past data indicates that the growth in meat sales is around one and a half times the
growth in the economy, the regression would look as follows

MS Growth = (GDP Growth) 1.5.

● The relationship between many variables also involves a constant. If meat sales are
trending up, growing one percent even in a stagnant economy, the equation would be:
MS Growth = (GDP Growth) _1.5 +1.
Multiple and Non-Linear Regression:

● The variable you are trying to estimate is referred to as dependent, while the variable
you use in the model to predict the dependent variable is called independent.

● A regression can only have one dependent variable. However, the number of potential
independent variables is unlimited and the model is referred to as multiple regressions if
it involves several independent variables.

● Regression models also can pinpoint more complex relationships between variables.

● Sometimes, a model uses the square, square-root or any other power of one or more
independent variables to predict the dependent one, which makes it a non-linear
regression. For example: MS Growth= 1/2 (Square root of GDP Growth).

Predicting the Future:

● The most common use of regression in business is to predict events that have yet to
occur.

● Demand analysis, for example, predicts how many units consumers will purchase. Many
other key parameters other than demand are dependent variables in regression models,
however.

● Predicting the number of shoppers who will pass in front of a particular billboard or the
number of viewers who will watch the Super Bowl may help management assess what
to pay for an advertisement.

● Insurance companies heavily rely on regression analysis to estimate how many policy
holders will be involved in accidents or be victims of burglaries.

Optimization of Business Processes:

● Another key use of regression models is the optimization of business processes. A

factory manager might, for example, build a model to understand the relationship
 between oven temperature and the shelf life of the cookies baked in those ovens. A
company operating a call centre may wish to know the relationship between wait times
of callers and number of complaints.

● A fundamental driver of enhanced productivity in business and rapid economic

advancement around the globe during the 20th century was the frequent use of
statistical tools in manufacturing as well as service industries.

● Today, a manager considers regression an indispensable tool.

Why Regression Analysis Is Important:

The importance of regression analysis is that it is all about data:

● Data means numbers and figures that actually define your business.

● The advantages of regression analysis is that it can allow you to essentially crunch the
numbers to help you make better decisions for your business currently and into the
future.

● The regression method of forecasting means studying the relationships between data

points, which can help you to:

▪ Predict sales in the near and long term.

▪ Understand inventory levels.
▪ Understand supply and demand.
▪ Review and understand how different variables impact all of these things.

Companies might use regression analysis to understand, for example:

▪ Why customer service calls dropped in the past year or even the past month.
▪ Predict what sales will look like in the next six month.
▪ Whether to choose one marketing promotion over another.
▪ Whether to expand the business or create and market a new product.
The benefit of regression analysis is that it can be used to understand all kinds of patterns that
occur in data. These new insights may often be very valuable in understanding what can make a
difference in your business.

Regression Analysis Example:

Though this sounds complicated, it's actually fairly simple.

You could simply look back at the activity of the GDP in the last quarter or in the last three-
month period, and compare it to your sales figure. In reality, the government reported that the
GDP grew 2.6 percent in the fourth quarter of 2018. If your sales rose 5.2 percent during that
same period, you'd have a pretty good idea that your sales generally rise at twice the rate of
GDP growth because:

5.2 percent (your sales) / 2.6 percent = 2

The "2" means that your sales are rising at twice the rate of the GDP. You might want to go
back a couple of more quarters to be sure this trend continues, say for an entire year. Suppose
you sell car parts, wheat, or forklifts. It would be the same regardless of the products or
services you sell. Since you know that your sales are increasing at twice the rate of GDP growth,
then if the GDP increases 4 percent the next quarter, your sales will likely rise 8 percent. If the
GDP goes up 3 percent, your sales would likely rise 6 percent, and so on.

In this way, regression analysis can be a valuable tool for forecasting sales and help you
determine whether you need to increase supplies, labour, production hours, and any number of
other factors.

Using Regression Analysis to Formulate Strategies:

Regression analysis uses data, specifically two or more variables, to provide some idea of where
future data points will be. The benefit of regression analysis is that this type of statistical
calculation gives businesses a way to see into the future. The regression method of
forecasting allows businesses to use specific strategies so that those predictions, such as future
sales, future needs for labor or supplies, or even future challenges, will yield meaningful
information.

The Five Applications of Regression Analysis:

The regression analysis method of forecasting generally involves five basic applications. There
are more, but businesses that believe in the advantages of regression analysis generally use the
following:

1. Predictive analytics:

● This application, which involves forecasting future opportunities and risks, is

the most widely used application of regression analysis in business.

● For example, predictive analytics might involve demand analysis, which

seeks to predict the number of items that consumers will purchase in the
future. Using statistical formulas, predictive analytics might predict the
number of shoppers who will pass in front of a given billboard and use then
use that information to place billboards where they will be the most visible
to potential shoppers.

● And, insurance companies use predictive analysis to estimate the credit

standing of policyholders and a possible number of claims in a given time
period.

2. Operation efficiency: 

● Companies use this application to optimize the business process. For

example, a factory manager might use regression analysis to see what the
impact of oven temperature will be on loaves of bread baked in those ovens,
such as how long their shelf life might be.
 ● Or, a call centre can use regression analysis to see the relationships between
wait times of callers and the number of complaints they register.

● This kind of data-driven decision-making can eliminate guesswork and make

the process of creating optimum efficiency less about gut instinct and more
about using well-crafted predictions based on real data.

3. Supporting decisions: 
● Many companies and their top managers today are using regression analysis
(and other kinds of data analytics) to make an informed business decision
and eliminate guesswork and gut intuition.
● Regression helps businesses adopt a scientific angle in their management
strategies. There is actually, often, too much data literally bombarding both
small and large businesses.
● Regression analysis helps managers sift through the data and pick the right
variables to make the most informed decisions
4. Correcting errors:
● Even the most informed and careful managers do make mistakes in
judgment. Regression analysis helps managers, and businesses in general,
recognize and correct errors.
● Suppose, for example, a retail store manager feels that extending shopping
hours will increase sales. Regression analysis may show that the modest rise
in sales might not be enough to offset the increased cost for labour and
operating expenses (such as using more electricity, for example).
● Using regression analysis could help a manager determine that an increase in
hours would not lead to an increase in profits. This could help the manager
avoid making a costly mistake

5. New Insights:

● Looking at the data can provide new and fresh insights. Many businesses
gather lots of data about their customers. But that data is meaningless
 without proper regression analysis, which can help find the relationship
between different variables to uncover patterns.

● For example, looking at the data through regression analysis might indicate
a spike in sales during certain days of the week and a drop in sales on others.

● Managers could then make adjustments to compensate, such as making

sure to maintain stock on those days, bringing in extra help, or even
ensuring that the best sales or service people are working on those days.

What Is the Significance of Regression Analysis in Business?

● Regression analysis, then, is clearly a significant factor in business because it is a
statistical method that allows firms, and their managers, to make better-informed
decisions based on hard numbers.
As Amy Gallo notes in the Harvard Business Review:
"In order to conduct a regression analysis, you gather the data on the variables in
question....You take all of your monthly sales numbers for, say, the past three years and any
data on the independent variables you’re interested in. So, in this case, let’s say you find out
the average monthly rainfall for the past three years. . . Glancing at this data, you probably
notice that sales are higher on days when it rains a lot. That’s interesting to know - but by how
much? If it rains 3 inches, do you know how much you’ll sell? What about if it rains 4 inches?"

● Regression analysis is significant, then, because it forces you, or any business, to take a
look at the actual data, rather than simply guessing.
● In Gallo's example, a business would plot the points showing monthly rainfall for the
past three years. That would be the independent variable. Then, you would look at the
monthly sales figures for the business for the past three years, which is the depending
variable:
● In essence, you're saying rising or falling sales depend on the amount of rainfall in a
given month.
Rain vs. Sales:

Suppose your business is selling umbrellas, winter jackets, or spray-on waterproof coating. You
might find that sales rise a bit when there are 2 inches of rain in a month. But you might also
see that sales rise 25 percent or more during months of heavy rainfall, where there are more
than 4 inches of rain. You could, then, be sure to stock up on umbrellas, winter jackets or spray-
on waterproof coating during those heavy-rain months. You might also extend business hours
during those months and possibly bring in more help.

The example shows the benefits of linear regression; that is, you are using a single line that you
draw through the plot points. The line might go up or down, depending on the rain total for
each month, but you are essentially comparing two variables: monthly rainfall versus monthly
sales. This type of linear regression gives you a clear, visual look at when a company's sales
crest and fall.

This example may seem obvious: More rain equals more sales of umbrellas or other rain-
related products. But it shows how any business, can use regression analysis to make data-
driven predictions about the future. Put another way, regression analysis can help your
business avoid potentially costly gut-level decisions - and instead - base your decisions about
the future on hard data, giving you a clearer, more accurate path into the future.