To investigate the relationship between variables, it is helpful to look at a graph of the data. Such a graph is often called a scatter diagram or a scatter plot. Normally, the independent variable is plotted on the horizontal axis and the dependent variable is plotted on the vertical axis. The following example will illustrate this.

Triple A Construction Company renovates old homes in Albany. Over time, the company has found that its dollar volume of renovation work is dependent on the Albany area payroll. The figures for Triple A’s revenues and the amount of money earned by wage earners in Albany for the past 6 years are presented in Table 4.1. Economists have predicted the local area payroll to be $600 million next year, and Triple A wants to plan accordingly.

Figure 4.1 provides a scatter diagram for the Triple A Construction data given in Table 4.1. This graph indicates that higher values for the local payroll seem to result in higher sales for the company. There is not a perfect relationship because not all the points lie in a straight line, but there is a relationship. A line has been drawn through the data to help show the relationship that exists between the payroll and sales. The points do not all lie on the line, so there would be some error involved if we tried to predict sales based on payroll using this or any other line. Many lines could be drawn through these points, but which one best represents the true relationship? Regression analysis provides the answer to this question.

Figure 4.1 Scatter Diagram of Triple A Construction Company Data