BUSINESS STATISTICS

Faculty : SOUJANYA L
Semester : I SEMESTER (MBA)
Programme Master of Business Administration
Department Commerce & Management Correlation and Regression
Module :
 Scatter Plot

• A scatter plot is a means to represent data in a graphical format. A

simple scatter plot makes use of the Coordinate axes to plot the points,
based on their values.
• Scatter plots are the graphs that present the relationship between two
variables in a data-set. It represents data points on a two-dimensional
plane or on a Cartesian system. The independent variable or attribute
is plotted on the X-axis, while the dependent variable is plotted on the
Y-axis. These plots are often called scatter graphs or scatter diagrams.
Scatter plots are used in either of the following situations.
• When we have paired numerical data
• When there are multiple values of the dependent variable for a unique
value of an independent variable
• In determining the relationship between variables in some scenarios,
such as identifying potential root causes of problems, checking
whether two products that appear to be related both occur with the
exact cause and so on.
The line drawn in a scatter plot, which is near to almost all the points in
the plot is known as “line of best fit” or “trend line“. See the graph
below.
 Types of
Scatter Plot
Types of Scatter Plot
• A scatter plot helps find the relationship between two variables. This
relationship is referred to as a correlation. Based on the correlation,
scatter plots can be classified as follows.
• Scatter Plot for Positive Correlation
• Scatter Plot for Negative Correlation
• Scatter Plot for Null Correlation
 Scatter Plot for Positive Correlation

• A scatter plot with increasing values of both variables can be said to

have a positive correlation. The scatter plot for the relationship
between the time spent studying for an examination and the marks
scored can be referred to as having a positive correlation.
 Scatter Plot for Negative Correlation

• A scatter plot with an increasing value of one variable and a

decreasing value for another variable can be said to have a negative
correlation. Observe the below image of negative scatter plot depicting
the amount of production of wheat against the respective price of
wheat
 Scatter Plot for Null Correlation

• A scatter plot with no clear increasing or decreasing trend in the values

of the variables is said to have no correlation. Here the points are
distributed randomly across the graph. For example, the data for the
number of birds on a tree at different times of the day does not show
any correlation. Observe the below scatter plot showing the number of
birds on a tree versus time of the day
The meteorological department has collected the following data about the temperature
and humidity in their town. Refer to the table given below and indicate the method to
find the humidity at a temperature of 60 degrees Fahrenheit
 Correlation
• Correlation refers to a process for establishing the relationships
between two variables. It also helps in understanding the
economic behaviour of the variables
• According to L.R. Connor, “If two or more quantities vary in
sympathy so that movements in one tend to be accompanied by
corresponding movements in others, then they are said to be
correlated.
• According to A.M. Tuttle, “Correlation is an analysis of covariation
between two or more variables.”
 Significance of
Correlation
• It helps determine the degree of correlation between the two
variables in a single figure.

• It makes understanding of economic behaviour easier and

identifies critical variables that are significant.

• When two variables are correlated, the value of one variable

can be estimated using the value of the other. This is
performed with the regression coefficients.

• In the business world, correlation helps in taking decisions.

The correlation helps in making predictions which helps in
reducing uncertainty. It is so because the predictions based
on correlation are probably reliable and close to reality.
 Positive Correlation
• When two variables move in the same direction; i.e., when one
increases the other also increases and vice-versa, then such a relation
is called a Positive Correlation.
• For example, Relationship between the price and supply, income and
expenditure, height and weight, etc
 2. Negative Correlation

• When two variables move in opposite directions; i.e., when one

increases the other decreases, and vice-versa, then such a relation is
called a Negative Correlation. For example, the relationship between
the price and demand, temperature and sale of woolen garments, etc.
• Speed of a Car vs. Time to Cover a Fixed Distance
• Study Hours vs. Exam Scores

Identify the type of correlation.

 Linear Correlation:
• When there is a constant change in the amount of one variable due to a
change in another variable, it is known as Linear Correlation. This
term is used when two variables change in the same ratio. If two
variables that change in a fixed proportion are displayed on graph
paper, a straight- line will be used to represent the relationship
between them.
 Non-Linear (Curvilinear) Correlation

• When there is no constant change in the amount of one variable due to

a change in another variable, it is known as a Non-Linear
Correlation. This term is used when two variables do not change in
the same ratio. This shows that it does not form a straight-line
relationship. For example, the production of grains would not
necessarily increase even if the use of fertilizers is doubled
Based on the number of variables involved, correlation can be classified as

1.Simple Correlation:
Simple correlation implies the study between the two variables only. For example, the
relationship between price and demand, and the relationship between price and money
supply.

2. Partial Correlation:
Partial correlation implies the study between the two variables keeping other variables
constant. For example, the production of wheat depends upon various factors like rainfall,
quality of manure, seeds, etc. But, if one studies the relationship between wheat and the
quality of seeds, keeping rainfall and manure constant, then it is a partial correlation
• 3. Multiple Correlation:

• Multiple correlation implies the study between three or

more three variables simultaneously. The entire set of
independent and dependent variables is studied
simultaneously. For example, the relationship between
wheat output with the quality of seeds and rainfall
 What Is the Correlation Coefficient?

• Correlation coefficients are used in science and finance to assess the

degree of association between two variables. The correlation
coefficient is a statistical measure of the strength of a linear
relationship between two variables. Its values can range from -1 to 1.
A correlation coefficient of -1 describes a perfect negative, or inverse,
correlation, with values in one series rising as those in the other
decline, and vice versa. A coefficient of 1 shows a perfect Positive
correlation, or a direct relationship. A correlation coefficient of 0
means there is no linear relationship.
 What is Karl Pearson’s Coefficient of Correlation?

The first person to give a mathematical formula for the measurement of

the degree of relationship between two variables in 1890 was Karl
Pearson. Karl Pearson’s Coefficient of Correlation is also known
as Product Moment Correlation or Simple Correlation
Coefficient. This method of measuring the coefficient of correlation is
the most popular and is widely used. It is denoted by ‘r’, where r is a
pure number which means that r has no unit.
• According to Karl Pearson, “Coefficient of Correlation
is calculated by dividing the sum of products of
deviations from their respective means by their number
of pairs and their standard deviations.”