CIMA BA1 Syllabus C. Informational Context Of Business - Scatter diagrams and lines of best fit - Notes ^{7 / 7}

Information about two variables that are considered to be related in some way can be represented on a form of graph known as a ‘scatter diagram’, each axis representing one variable.

For example, the level of advertising expenditure and sales revenue of a product, or the level of electricity cost and the number of units produced can be plotted against each other.

The values of the two variables are plotted together to show a number of points on the graph.

The way in which these are scattered or dispersed indicates if any relationship is likely to exist between the variables.

The following scatter graph shows the relationship between 2 variables:

- the independent variable can be the units
- the dependent variable can be production cost.

.

The "best-fit" line (trend line) is the straight line which passes as near to as many of the points as possible. By drawing such a line, we are attempting to minimise the effects of random errors in the measurements.

For example, if our points look like this

The line of best fit would be drawn as follows

When we have our line of best fit drawn on the scatter diagram, we can use it to read off values for the variables at any points on the axes.

In doing this, we have to assume that the line of best fit is accurately drawn and that the relationship established, based on past data, will also apply in the future - this is known as extrapolating the trend.

Using scatter diagrams with lines of best fit is useful as a forecasting technique and has the advantage of relative simplicity.