Appendix 1 Applying Graphs to Economics Key Concepts

Appendix 1 Applying Graphs to Economics • Key Concepts • Summary • Practice Quiz © 2004 Thomson/South-Western

What is a direct relationship between two variables? When one increases, the other increases and vice versa 3

What is an inverse relationship between two variables? When one increases, the other decreases and vice versa 4

What is the slope of a line? The ratio of change in the variable on the vertical axis (the rise or fall) to change in the variable on the horizontal axis (the run). 5

Slope = rise/run = vertical axis/ horizontal axis = Y/ X 6

Expenditure for Personal Computer at Different Annual Incomes Personal Expenditure $1, 000 $2, 000 $3, 000 $4, 000 Annual Income $10, 000 $20, 000 $30, 000 $40, 000 7

Positive Sloping Curve Y 20 15 10 D C 5 5 10 15 20 X 8

Thousands Dollars Y D 4 3 2 1 C B A Y=1 X=10 10 20 Thousands 30 40 X 9

Quantity of Compact Discs Consumers Purchased at Different Prices Price per compact disc $20 $15 $10 $5 Quantity of compact discs 25, 000 50, 000 75, 000 100, 000 10

Y Dollars 20 15 10 5 Negative Sloping Curve A B C Y=5 X=25 D X 25 50 75 100 Millions 11

What is an independent relationship between two variables? When one variable changes, the other variable is unchanged 12

Expenditure for Toothpaste at Different Annual Incomes Personal Expenditure $20 $20 Annual Income $10, 000 $20, 000 $30, 000 $40, 000 13

Y Dollars 40 30 20 10 A B C D X=10 Y=0 10 20 30 40 Thousands X 14

Can slope vary along a curve? Yes, the slope of a curve can vary along the curve 15

Y 4 3 2 1 A Y=2 X=30 10 20 30 40 X 16

Y 20 15 10 5 Y= -10 A X=50 X 25 50 75 100 17

How can I tell the difference between a movement along a curve and a shift in the curve? When price changes, there is movement along a curve. When something other than price changes, the whole curve shifts 18

What is an example of a change other than price? When income increases the whole demand curve shifts upward 19

Y 20 15 Annual Income $60, 000 10 5 Annual Income $30, 000 X 25 50 75 100 20

Key Concepts 21

• What is a direct relationship between two variables? • What is the slope of a line? • What is an inverse relationship between two variables? • What is an independent relationship between two variables? • Can slope vary along a curve? • What can change other than price? 22

Summary 23

Graphs provide a means to clearly show economic relationships in two -dimensional space. Economic analysis is often concerned with two variables confined to the upper right-hand (northeast) quadrant of the coordinate number system. 24

Y A direct relationship D 4 3 2 1 C B A Y=1 X=10 10 20 30 40 X 25

Y 20 15 10 5 An inverse relationship A B C Y=5 X=25 D X 25 50 75 100 26

Y 40 30 20 10 An independent relationship A B C D X=10 Y=0 10 20 30 40 X 27

Y 4 3 2 1 Positive slope of an upward-sloping curve A Y=2 X=30 10 20 30 40 X 28

Y 20 15 10 5 Negative slope of an downward-sloping curve Y= -10 A X=50 X 25 50 75 100 29

A shift in a curve occurs only when the ceteris paribus assumption is relaxed and a third variable not on either axis of the graph is allowed to change 30

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