What Do Economists Do When They Do Economics

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What Do Economists Do When They Do Economics?

• An Introduction to Regression Analysis

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Tasks Performed by Economists

• Describe economic reality Estimate demand and
  supply elasticities.
• Confront economic theory with facts. Test
  hypotheses about economic behavior
• Develop new theoretical models about how scarce
  resources are allocated among competing
  alternatives
• Predict behavior of economic variables.

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Example Describe Economic Reality

• What is Income Elasticity of Demand for Milk
• Define Income Elasticity of Demand
• Data Needed To Calculate It
• Controlled Experiment vs Real World
• Chance events, measurement error, the
  indeterminacy of human behavior
• Statistical Estimation

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Other Examples?

• Describe Economic Reality?
• Test Hypotheses?
• New Theory
• Predict Behavior

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The Econometricians Job

• True Relationship
• Qmilkib0b1IncomeI
• Observed Relationship
• Qmilkib0b1Incomei ei
• ei is the disturbance term

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Why the disturbance term?

• Omission of the influence of innumerable chance
  events
• Measurement error
• Human indeterminacy
• Unobservables

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Consequences of Disturbance Term
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Why Regression Analysis?

• Relationship between Y and X must be estimated
  rather than calculated.
• Regression analysis attempts to explain
  movements in Y (the dependent variable) as a
  function of movements in X (the explanatory
  variable)
• Regression analysis provides an estimate of the
  Y-intercept and of the slope.

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Example Maintenance Costs

• Dependent Variable
• Cumulative Cost of Maintenance
• Explanatory Variable
• Weeks Owned

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Estimated Equation
Source SS df MS
Number of obs 56 -------------------
-------------------- F( 1, 54)
449.70 Model 63155370.1 1
63155370.1 Prob gt F
0.0000 Residual 7583768.80 54 140440.163
R-squared 0.8928 -------------
-------------------------- Adj
R-squared 0.8908 Total 70739138.9 55
1286166.16 Root MSE
374.75 ------------------------------------------
------------------------------------ cost
Coef. Std. Err. t Pgtt 95
Conf. Interval ---------------------------------
--------------------------------------------
weeks 7.169604 .3380926 21.206 0.000
6.491769 7.847439 _cons -619.7356
107.3413 -5.774 0.000 -834.9419
-404.5292 ----------------------------------------
--------------------------------------
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QUESTIONS

• What is effect on maintenance cost of an
  additional week of ownership?
• What are the other numbers reported in this
  table?
• How was beta estimated? --
• Why was beta estimated this way?
• Whats in the disturbance term?

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How Does OLS Work?

• OLS chooses a,b to minimize the sum of the
  squared residuals

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A Second Equation
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Multiple Regression Analysis

• YiabxXibzZiei
• Regression Analysis isolates the impact on Y of
  changes in X from the impact on Y of changes in Z.

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Venn Diagram
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When Is Regression Analysis Inappropriate?

• No variation in the key explanatory variable
• Relationship between X and Y is an identity
• To predict impact of Y of large changes in X when
  variation in X has tended to be small

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Course Organization

• Course web page
• http//www.economics.pomona.edu/cconrad/regressf00
  .html
• Course requirements
• Textbook, etc
• Studenmund, A.H., Using Econometrics
• Rules
• Review late homework policies
• During class, DO NOT use the keyboards unless
  instructed. Do Not Read Your E-Mail.