Correlation and elasticity
| English | Chinese | Pinyin |
|---|---|---|
| correlation | 相关性 | xiāng guān xìng |
| scatter graph | 散点图 | sàn diǎn tú |
| positive | 正相关 | zhèng xiāng guān |
| negative | 负相关 | fù xiāng guān |
| causation | 因果关系 | yīn guǒ guān xì |
| income elasticity | 收入弹性 | shōu rù tán xìng |
| promotional | 促销 | cù xiāo |
Does spending more actually sell more?
- A firm doubles its advertising — do sales follow? To answer, it looks for a relationship between the two.
- Correlation 相关性 measures how strongly two variables move together.
If sales rise as advertising rises, the two show:
Both moving up together is positive correlation.
A graph that plots paired data points to show a relationship is a ______ graph.
A line of best fit summarises the correlation.
Scatter graphs 散点图 and correlation
- A scatter graph plots paired data (e.g. advertising vs sales).
- Positive 正相关 correlation: both rise together. Negative 负相关: one rises as the other falls. None: no pattern.
A line of best fit summarises the relationship — here, positive correlation.
Correlation
r measures the link
Correlation r shows how closely two variables move together — but it isn't causation.
A strong correlation between two variables:
Correlation is not causation — a third factor may explain it.
Two variables can be strongly correlated because of a third, hidden factor.
A lurking variable can drive both.
Correlation is not causation 因果关系
- A strong correlation does not prove one thing causes the other.
- A third factor, or coincidence, may explain it — always think about why.
Positive and negative correlation between two variables
Income elasticity of demand measures how demand responds to a change in:
Income elasticity relates demand to income.
Other elasticities
- Income elasticity 收入弹性: how demand responds to a change in income.
- Promotional 促销 (advertising) elasticity: how demand responds to a change in promotion spend.
Correlation ≠ causation. Ice-cream sales and drownings both rise in summer, but ice cream doesn't cause drowning — hot weather drives both. Never assume a relationship is causal without good reason.
Elastic demand is flat; inelastic demand is steep
You've got it
- a scatter graph shows positive, negative or no correlation
- correlation does not prove causation — a third factor may be at work
- income and promotional elasticity measure demand's response to income and advertising