Chapter 3

Summarizing Descriptive
Relationships

Scatter Plots

1.
2.
3.
4.

We can prepare a scatter plot by placing one

point for each pair of two variables that
represent an observation in the data set. The
scatter plot provides a picture of the data
including the following:
Range of each variable;
Pattern of values over the range;
A suggestion as to a possible relationship
between the two variables;
Indication of outliers (extreme points).

Scatter Plots
(Excel Example)
Rent vs. Apartment Size (Sq. Ft)
2500

Rent

2000
1500
1000
500
0
0

500

1000

1500
Size

2000

2500

Covariance
The covariance is a measure of the linear
relationship between two variables. A positive value
indicates a direct or increasing linear relationship and
a negative value indicates a decreasing linear
relationship. The covariance calculation is defined by
the equation
n

Cov ( x, y ) s xy

( x X )( y
i 1

Y )

n 1

where xi and yi are the observed values, X and Y are the

sample means, and n is the sample size.

Covariance
Scatter Plots of Idealized
Positive and Negative Covariance
y

y
* *

* **

* * *

* *
*

**
Y

* *

*
* * *
**

* *
**
X

Positive Covariance

Negative Covariance

(Figure 3.5a)

(Figure 3.5b)

Correlation Coefficient

The sample correlation coefficient, rxy, is

computed by the equation

Cov ( x, y )
rxy
sx s y

Correlation Coefficient
The correlation ranges from 1 to +1
with,

rxy = +1 indicates a perfect positive

linear relationship the X and Y points
would plot an increasing straight line.
rxy = 0 indicates no linear relationship
between X and Y.
rxy = -1 indicates a perfect negative
linear relationship the X and Y points
would plot a decreasing straight line.

Correlation Coefficient
Positive correlations indicate
positive or increasing linear
relationships with values closer to
+1 indicating data points closer to a
straight line and closer to 0
indicating greater deviations from a
straight line.

Correlation Coefficient
Negative correlations indicate
decreasing linear relationships with
values closer to 1 indicating points
closer to a straight line and closer to
0 indicating greater deviations from a
straight line.

Scatter Plots and Correlation

Y

(a) r = .8

Scatter Plots and Correlation

Y

(b)r = -.8

Scatter Plots and Correlation

Y

(c) r = 0

Linear Relationships
Linear relationships can be represented by the basic
equation

Y 0 1 X

where Y is the dependent or endogenous variable that is

a function of X the independent or exogenous variable.
The model contains two parameters, 0 and 1 that are
defined as model coefficients. The coefficient 0, is the
intercept on the Y-axis and the coefficient 1 is the
change in Y for every unit change in X.

Linear Relationships
The nominal assumption made in linear
applications is that different values of X can be
set and there will be a corresponding mean value
of Y that results because of the underlying linear
process being studied. The linear equation model
computes the mean of Y for every value of X.
This idea is the basis for obtaining many
economic and business procedures including
demand functions, production functions,
consumption functions, sales forecasts,and many
other application areas.

Linear Function and Data Points

y b0 b1 x1
y

Yi
ei
(x1i, yi)

x1

Least Squares Regression

Least Squares Regression is a
technique used to obtain estimates (i.e.
numerical values) for the linear
coefficients 0 and 1. These estimates
are usually defined as b0 and b1
respectively.

Excel Regression Output

SUMMARY OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations

0.560264658
0.313896487
0.303341048
0.330316589
67

ANOVA
df
Regression
Residual
Total

Intercept
Satverb

SS
1
65
66

MS
F
Significance F
3.244673026 3.244673026 29.73789125
8.22E-07
7.092088168 0.109109049
10.33676119

Coefficients Standard Error t Stat

P-value
1.6384
0.2679
6.1147
0.0274
0.005
5.4532

The y-intercept, b0 = 1.6384 and the slope b1 = 0.0274

Lower 95%
Upper 95%
0
1.1033
2.1735
0
0.0174
0.0375

Cross Tables
Cross Tables present the number of
observations that are defined by the
joint occurrence of specific intervals
for two variables. The combination
of all possible intervals for the two
variables defines the cells in a table.

Cross Tables
Lumbe
Paint
r

Area

Tools

None

Total

East

100

50

50

50

250

North

50

95

45

60

250

West

65

70

75

40

250

215

215

170

150

750

Cross Table of Household Demand for Products by Residence

Key Words
Least Squares
Estimation Procedure
Least Squares
Regression
Sample Correlation
Coefficient

Sample Covariance
Scatter Plot