Two Variable Regression model

 Two Variable Regression model

Two variable regression model shows the relationship between one dependent and one independent variable  

Dependent variable depend on independent variable  

Independent variable predict the dependent variable 

Two variable Regression model shows how dependent variable change due to the change of independent variable.

Two Variable Regression model is also called simple linear regression model.

Mathematically , we can express as:

Y=β1+β2X+ε

Y=Dependent variable

β1=Intercept

β2=Slope

X=Independent variable 

ε=Error term

Econometrics And Steps Of Traditional Econometrics

 
     Econometrics And Steps Of Traditional Econometrics

Econometrics: Econometrics means economic measurement that uses different Statistical and mathematical tools to analyze economic phenomena, economic theory ,economic data or hypothesis.

In other words, econometrics is a branch of economics in which the tools of economic theory, mathematics and statistics are used to analyze economic phenomena.

                    8 steps of Traditional Econometrics:

1.Statement OF Theory: The first step is to give the economic theory of the subject we want to know about.  Assuming that we want to know the effect of income on consumer consumption... we can say that income and consumption are positively related.

2.Mathematical Model: In this step , economic theory is expressed as mathematically. 

                                Y=β1+β2X

mathematical model, shows the relationship between two variables. if this consumption function, Y = consumption , X =income, β1=intercept ,β2=slope coefficient or MRS(marginal rate of substitution).

3.Econometric Model: in  econometric model, error term is included.

Y=β1+β2X+μ

μ=Disturbance or error term.

(Represents all factors that affect  on the model.)

4.Data Collect:

Collect essential and reliable data .This data may be cross sectional data , time series data, pooled data or panel data .

5.Estimation of the Econometric Model: After collecting the data, the parameters have to be estimated.  If we are working on a consumption function then we need to estimate the parameter of the consumption function. Generally , regression analysis is used to estimate parameters.

6.Hypothesis Testing: After estimating the parameters, hypothesis testing should be done to see how much the parameter supports the economic theory and how much the estimated parameters are sufficient for the model.

7.Prediction:

Y=β1+β2X+μ

Y=predicted variable

X=predictor

If our considered model does not explain the hypothesis or theory then the predictor X has to predict the dependent variable or the predicted variable Y.

8.Policy implications: The estimated model may  be used for policy purposes. The government can manipulate the control variable with the help of monetary and fiscal policy to get predicted variables.

Asymmetric information

Asymmetric information refers to when two parties to a transaction do not have equal information. 

 Of the two parties, either party will have more information.  As a result, he will benefit more than the other party. Generally, when selling a product, the seller has more information than the buyer. 

As a result, the seller is more profitable than the buyer. Inversely, if the buyers have more information than sellers, buyers will be more profitable than sellers for asymmetric information

Market disequilibrium | Excess Supply | excess demand

Market disequilibrium | Excess Supply | Excess demand

Market is not in equilibrium, because there is either excess supply and excess demand in the market.

In the above curve shows the market Disequilibrium situation when excess supply exists in the market because of price increase.E is the equilibrium situation where quantity supply and demand are Equal.Equlibrium price Pe and equilibrium quantity Qe.When price increase from  Pe to P1 , quantity supplied also increases from Qe to Qs . Because, price and quantity supply are positively related.When price increase in the market,producer want to earn more profit by selling their products.In this time, create excess supply in the market.This is the surplus in the market.

In the above figure shows that excess demand in the market.This is the shortage in the market.We know that price and quantity demanded are negatively related.When price decrease quantity demanded also increases.In the above figure,when price decrease from Qe to Q1 , quantity demanded also increases from Qe to Qd.At this time create excess demand in the market.Because when price will decrease, consumer wants to purchase more products.

Reasons For Shifting In The Supply Curve

               Reasons For Shifting In The Supply Curve

There are many reasons for shifting in the supply curve. Now , we will know about some reasons for shifting in the supply curve.

Input price:

If the price of the inputs used in any production increases, then the producer will not get more profit by producing, this time the producer will reduce his production. When he reduces the production due to the increase in the input price, then his supply curve  will shift to the left. But when the input price decreases, he will increase production again, then his supply curve will shift to the right.

Technology:
If advanced technology is used, less labor is required during production, thereby reducing the producer's cost of production.   As a result, he will be able to produce more at lower cost.

Expectations:

If the producer expects that the price of what he is producing may increase in the future, then he will store it without supplying it.  The market supply will then decrease and the supply curve will shift to the left.  But if he expects that the price of his product may decrease in the future, then he will supply his product to the market now and the supply curve will shift to the right.

Number Of Sellers:
When the number of suppliers in the market increases, the supply curve will shift to the right and when the number of suppliers in the market decreases, the supply curve will shift to the left. Because if the number of suppliers increases, the supply will increase and if the number of suppliers decreases, the supply will decrease.

Reasons For Shifting In The Demand Curve

 Reasons For Shifting In The Demand Curve

There are some reasons for shifting in the demand curve

Income: when income changes , demand curve also changes.

But the shift in demand curve due to change in income is different for normal goods and inferior goods.

For Normal Goods :

When income increases, the demand for normal goods increases and when income decreases, the demand for normal goods decreases.  For this reason, when income increases, the demand curve shifts to the right and when income decreases, the demand curve shifts to the left for normal goods.

For Inferior Goods:

Income and inferior goods are negatively related.  When income increases, the demand for inferior goods decreases and when income decreases, the demand for inferior goods increases. Therefore, when income increases, the demand curve for inferior goods shifts to the left and when income decreases, the demand curve shifts to the right.

Price Of Related Goods :Shift in demand curve for substitutes goods and complements goods are related to price. 

Substitutes Goods :

In the case of substitute goods, when the price of one goods increases, the demand for the other will increase, then the demand curve will shift to the right, and when the price of one decreases, the demand for the other will decrease, then the demand curve will shift to the left.
  

For Complements Good

In the case of complements goods, when the price of one goods increases, the demand for the other will decrease, then the demand curve will shift to the left , and when the price of one decreases, the demand for the other will increase, then the demand curve will shift to the right.

Taste:

The goods that the consumer likes more will certainly consume more and the goods that consumers likes less will consume less.

Expectation:

If the consumer expects the price of goods to decrease in the future, he will wait for the future rather than buying now.  He will consume the goods when the price falls but if he expects the price to rise in the future he will keep buying the goods now.

Number of Buyers :

If the number of buyers in the market is more, the demand for goods will be more, then the demand curve will shift to the right and if the number of buyers in the market is less, then the demand for goods will decrease, then the demand curve will shift to the left.

Market supply

 

                    MARKET SUPPLY 

   Market supply  is the sum of individual supply.

    In the above table shows the the individual supply and market supply.

 Supposed that X and Y are two individuals .When price 2, quantity supply of X is  5 and quantity of Y is 4 .So, market supply is 9

When price 3..,

Supply of X is 6 and quantity supply of Y is 5

Market supply=6+5=11

When price 4,.

Market supply is 7+6=13

When price 5,

Market supply=8+7=15

In the above curve shows that Market supply curve... Market supply is the horizontal sum of individual supply.

When price increase, Individuals supply and market supply also increases.

Normal Goods | Inferior Goods | Substitutes Goods | Complements Goods

Discuss about normal goods ,inferior goods , substitutes goods and complements. 

 

Normal goods 

Other things being equal,when the demand of a goods increases as income increases and the demand of a goods decreases as income decreases,then those goods are called normal goods.

For Example:

If rice is your normal goods, When your income increases the consumption of rice will increase and When the income decreases the consumption of rice will decrease.

         

Inferior goods: Other things being equal,when the demand of a goods increases as income decreases and the demand of a goods decreases as income increases,then those goods are called inferior goods.

For example:If used cars and used clothes are your inferior goods,when your income increases then the consumption will decrease and when income decreases then the consumption will increase.

                  Substitute goods 

All other things being equal, if an increase in the price of one leads to an increase in the demand for the other goods and a decrease in the price of one leads to decrease in the demand for the other goods,those goods are called substitutes goods.

Tea and coffee are substitute goods .An increase price of tea leads to increase demand of coffee and decrease the price of tea leads to decrease the demand of coffee.

                   

            Complements Goods 

    All other things being equal, if an increase in the price of one leads to an decrease in the demand for the other goods and a decrease in the price of one leads to  increase  in the demand for the other goods,those goods are called complements goods.

Pen and ink are complements goods.An increases price of ink leads to decrease demand of pen and decrease the price of ink leads to increase the demand of pen.

Market Demand

   Market Demand 

Market demand is sum of individual demand.

In the above table shows the individual demand and market demand.Two individual:X and Y.When price 1 ,the demand of X is 6 and the demand of Y is 5 .Sum of individual demand:6 and 5 equal to 11.So, market demand is 11.similarly, at price 2, demand of X is 5 and the demand of Y is 4. Market demand=5+4=9; market demand is 9

At price 3, demand of X +demand of Y 

=4+3=7(market demand)

At price 4, Market demand=demand of X+demand of Y

=3+2=5

Graphical Explanation of market demand 

In graphically,market demand is horizontal sum of individual demand.At price 1 , market demand is horizontal sum of 4 and 6 equal to 11.

We know that price and demand is inversely related.When price increase, quantity demand also decreases creases.similarly market demand also decreases 

Market Equilibrium

     Market Equilibrium 

Market Equilibrium is a market situation in which quantity supplied and quantity demanded is Equal.

In the above graph shows the Market Price is on vertical axis and quantity is on horizontal axis.

At point E quantity supplied and quantity demanded is equal.Demand curve is downward sloping, because when price increase of a goods and services, quantity demanded of this goods and services decreases and when the price of goods and services decrease,the quantity demand of this goods and services increase.Price and quantity demanded are negatively related.

Supply curve is upward sloping, because when's price increase of a goods and services, quantity supplied of this goods and services also increases and when the price of goods and services decrease,the quantity supplied of this goods and services decrease.Price and quantity supplied are positively related.

Supply |Law Of Supply | Supply Schedule |Supply Curve

                  Supply

Supply is the certain amount of goods and services that sellers are willing and able to provide to consumers at various prices .

                Law Of Supply

All other things unchanged, when the price of goods and services increases , the quantity supplied of this goods and services also increases and when the price of goods and services decreases , the quantity supplied of this goods and services also decreases .

                 Supply Schedule

Supply schedule is a table that shows the positive relationship between price and quantity supplied

In the above table , when price 2, quantity supplied 10, when price increases 2 to 4, quantity supplied increases 10 to 15.when price increases 4 to 6 , quantity supplied increases 15 to 20.

                               Supply Curve

supply curve is a graph that shows the positive relationship between price and quantity supplied.

Price is on vertical axis and quantity supplied is on horizontal axis.Supply curve is upward sloping, because price and quantity supplied is positively related.when price increase, quantity supplied also increases and when  price decrease, quantity supplied also decreases.

  

Demand | Law Of Demand | Demand Schedule | Demand Curve | Demand function

                     Demand 

Demand is the willingness and ability to purchase goods and services of consumers at various prices .

                    Law Of Demand

All other things unchanged ,when price increases of goods and services , the quantity demand of this goods and services also decreases  and when the  price decreases of goods and services , the quantity demand of this goods and services also increases .

                      Demand Schedule

Demand Schedule is a table that  Shows the inverse relationship between price and quantity demanded.

                Demand Function

Qd =a-bP

Qd=Quantity demanded (Shows that how price determine quantity demand of goods and services)

a=intercept(shows quantity demand when price zero)

b=slope of the demand function

P=price of goods and services

                                              Demand Curve

                                   

                              

Demand curve is a graph that shows the inverse relationship between price and quantity demand .Demand curve is downward sloping because when price increases , quantity demand also decreases and when price decreases , quantity demand also increases of goods and services.