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Basic Simple Linear Regression

The document explains linear regression, detailing how a dependent variable is related to independent variables through a linear equation. It covers key concepts such as the correlation coefficient, coefficient of determination, and standard error of the estimate, along with examples of forecasting demand based on advertising expenditures and trend projections. Additionally, it includes practical applications for forecasting weekly demand data using regression analysis.

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karenaza
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2 views

Basic Simple Linear Regression

The document explains linear regression, detailing how a dependent variable is related to independent variables through a linear equation. It covers key concepts such as the correlation coefficient, coefficient of determination, and standard error of the estimate, along with examples of forecasting demand based on advertising expenditures and trend projections. Additionally, it includes practical applications for forecasting weekly demand data using regression analysis.

Uploaded by

karenaza
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Linear Regression

• A dependent variable is related to one or more


independent variables by a linear equation
• The independent variables are assumed to “cause”
the results observed in the past
• Simple linear regression model is a straight line
Y = a + bX
where
Y = dependent variable
X = independent variable
a = Y-intercept of the line
b = slope of the line
Linear Regression
Y
Deviation, Regression
or error equation:
Estimate of Y = a + bX
Dependent variable

Y from
regression
equation
Actual
value
of Y

Value of X used
to estimate Y

X
Independent variable
Linear Regression
• The sample correlation coefficient, r
• Measures the direction and strength of the relationship
between the independent variable and the dependent
variable.
• The value of r can range from –1.00 ≤ r ≤ 1.00
• The sample coefficient of determination, r2
• Measures the amount of variation in the dependent
variable about its mean that is explained by the regression
line
• The values of r2 range from 0.00 ≤ r2 ≤ 1.00
• The standard error of the estimate, syx
• Measures how closely the data on the dependent variable
cluster around the regression line
Example 14.2
The supply chain manager seeks a better way to forecast the
demand for door hinges and believes that the demand is
related to advertising expenditures. The following are sales
and advertising data for the past 5 months:
Month Sales (thousands of units) Advertising (thousands of $)
1 264 2.5
2 116 1.3
3 165 1.4
4 101 1.0
5 209 2.0
The company will spend $1,750 next month on advertising for the
product. Use linear regression to develop an equation and a
forecast for this product.
Example 14.2
We used POM for Windows to determine the best values
of a, b, the correlation coefficient, the coefficient of
determination, and the standard error of the estimate
a = –8.135
b = 109.229X
r = 0.980
r2 = 0.960
syx = 15.603

The regression equation is


Y = –8.135 + 109.229X
Example 14.2
The r of 0.98 suggests an unusually strong positive relationship
between sales and advertising expenditures. The coefficient of
determination, r2, implies that 98 percent of the variation in
sales is explained by advertising expenditures.

Brass Door Hinge X


250 –
Sales (000 units)

200 – X
X X
150 –
Data
X X
100 –
Forecasts
50 –

| |
0–
1.0 2.0
Advertising ($000)
Example 14.2
• Forecast for month 6:
Y = –8.135 + 109.229X

Y = –8.135 + 109.229(1.75)

Y = 183.016 or 183,016 units


Trend Projection with Regression
• A trend in a time series is a systematic
increase or decrease in the average of the
series over time
• The forecast can be improved by calculating
an estimate of the trend
• Trend Projection with Regression accounts
for the trend with simple linear regression
analysis.
Example 14.5
• Medanalysis, Inc., provides medical laboratory
services
• Managers are interested in forecasting the number
of blood analysis requests per week
• There has been a national increase in requests for
standard blood tests.
• The arrivals over the next 16 weeks are given on the
following slide.
• What is the forecasted demand for the next three
periods?
Example 14.5

First Model
Example 14.5
Example 14.5

Second
Model
Example 14.5

Third Model
Application 14.4
• Use Excel to project the following weekly demand
data using trend projection with regression.
• What is the forecasted demand for periods 11-14?

Week Demand Week Demand


1 24 6 42
2 34 7 39
3 29 8 56
4 27 9 45
5 39 10 43
Application 14.4

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