CHAPTER 8Modeling Relationships Between Two Variables
In many analytics applications, we need to try to determine how two variables are related. This chapter is a primer on how analysts can determine the relationship between two variables.
Examples of Relationships Between Two Variables
Often, we want to predict a dependent variable (call it Y) from an independent variable (call it X). Table 8.1 lists some examples of business relationships you might want to estimate.
Table 8.1: Examples of relationships between two variables
| X (INDEPENDENT VARIABLE) | Y (DEPENDENT VARIABLE) |
| Units produced by a plant in a month | Monthly cost of operating plant |
| Monthly dollars spent on advertising | Monthly sales |
| Number of employees | Monthly travel expenses |
| Company annual revenue | Number of employees |
| Monthly return on the stock market | Monthly return on a mutual fund or stock |
| Square feet in home | Home price |
| Price of product | Units sold of product |
Finding the Best-Fitting (Least Squares) Line
The first step in determining how two variables are related is to create a scatterplot graph where each data point, the value of X is on the horizontal axis, and the value of Y is on the vertical axis. If your graph indicates that a straight line is a reasonable fit to the data, you can use the Excel Trendline feature (or Excel functions) to find the straight line that best fits the points. The “Excel Calculations” section at the end of the chapter describes how to find the straight ...
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