The Scatter Diagram Method is the simplest method to study the correlation between two variables wherein the values for each pair of a variable is plotted on a graph in the form of dots thereby obtaining as many points as the number of observations. Then by looking at the scatter of several points, the degree of correlation is ascertained.
The degree to which the variables are related to each other depends on the manner in which the points are scattered over the chart. The more the points plotted are scattered over the chart, the lesser is the degree of correlation between the variables. The more the points plotted are closer to the line, the higher is the degree of correlation. The degree of correlation is denoted by “r”.
The following types of scatter diagrams tell about the degree of correlation between variable X and variable Y.
1. Perfect Positive Correlation (r=+1): The correlation is said to be perfectly positive when all the points lie on the straight line rising from the lower lefthand corner to the upper righthand corner.
2. Perfect Negative Correlation (r=1): When all the points lie on a straight line falling from the upper lefthand corner to the lower righthand corner, the variables are said to be negatively correlated.
3. High Degree of +Ve Correlation (r= + High): The degree of correlation is high when the points plotted fall under the narrow band and is said to be positive when these show the rising tendency from the lower lefthand corner to the upper righthand corner.
4. High Degree of –Ve Correlation (r= – High): The degree of negative correlation is high when the point plotted fall in the narrow band and show the declining tendency from the upper lefthand corner to the lower righthand corner.
5. Low degree of +Ve Correlation (r= + Low): The correlation between the variables is said to be low but positive when the points are highly scattered over the graph and show a rising tendency from the lower lefthand corner to the upper righthand corner.
6. Low Degree of –Ve Correlation (r= + Low): The degree of correlation is low and negative when the points are scattered over the graph and the show the falling tendency from the upper lefthand corner to the lower righthand corner.
7. No Correlation (r= 0): The variable is said to be unrelated when the points are haphazardly scattered over the graph and do not show any specific pattern. Here the correlation is absent and hence r = 0.
Thus, the scatter diagram method is the simplest device to study the degree of relationship between the variables by plotting the dots for each pair of variable values given. The chart on which the dots are plotted is also called as a Dotogram.
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1. What is a scatter diagram and how is it used in business mathematics and statistics? 
2. How can I determine the correlation between two variables using a scatter diagram? 
3. Can a scatter diagram be used to predict future values of a variable? 
4. What is the difference between correlation and regression analysis in business mathematics and statistics? 
5. How can I interpret the results of a regression analysis based on a scatter diagram? 
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