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Department

Economics

Course Code

ECO220Y1

Professor

Victor Yu

ECO220

May 2018

1

Ch. 7: Introduction to Linear Regression

LO 7.1 The Linear Model

Linear model (line of best fit OR regression line): an equation of a straight line through the

data fit by least squares

3 basic steps of regression analysis

1. Start with some data

2. Fit a model to the data

3. Use the model to predict an estimate of something you would like to know

Explanatory variable (independent variable): the variables used to explain the value of

another variable, usually denoted by x

• On the horizontal x-axis

Predicted variable (response/dependent variable): the variable whose value depends on the

value of the explanatory variable usually denoted by y

• On the vertical y-axis

Residuals

Predicted value: the prediction for y found for each x-value in the data.

• Found by substituting the x-value in the regression equation

• Are values on the fitted line

The difference between y and the predicted value (𝑦̂) is called the residual

𝑒=𝑦−𝑦̂

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