In a regression analysis of the form:

y = a + bx + E

where E is the error term, what is the error term composed of? I know it is the unexplained variation in observed y when using x to predict y, but is it the average variation or the total variation? For example suppose you have a regression analysis that explains most of the variation in observed and you have a million data points. The variation of each is small but the total is large due to the availability of so many data points.

Now compare this to a regression equation with a few data points but a large amount of unexplained variation. The average is large but the total small, at least compared to the total of the million data points. Thefore the equation based on lots of data looks like it has a larger error.

This doesn't seem right to me so is the error term based on theaverageerror or some some similar measure?