Appendix: Graphs in Economics

Introduction

Graphs are essential tools in microeconomics for visualizing relationships between economic variables. Understanding how to construct, interpret, and analyze graphs is fundamental for studying economic models and real-world data.

Graphing Data

Basic Elements of a Graph

• Axes: Most economic graphs use two perpendicular scale lines: the y-axis (vertical) and the x-axis (horizontal).

• Origin: The point where the axes intersect, representing zero for both variables.

• Variables: Economic graphs typically plot quantity against another variable, such as price or time.

Plotting Points

• To plot a point, identify its x-value and y-value.

• Example: Plotting a point at 10°C and 5,959 m above sea level involves finding 10 on the x-axis (temperature) and 5,959 on the y-axis (height).

Economic Variables in Graphs

• Economists use graphs to represent variables such as quantities produced, prices, income, and expenditure.

• Graphs help answer questions about what, how, and for whom goods and services are produced.

Reading Economic Graphs

• Each point on a graph represents a specific combination of two variables.

• Example: In 2023, 61 million movie tickets were bought at an average price of $9.17 per ticket.

Scatter Diagrams

Definition and Purpose

• A scatter diagram plots the value of one variable against another for several observations.

• It reveals whether a relationship exists between the two variables.

Application Example

• Plotting the production budgets and worldwide box office revenues for nine movies can show if higher budgets are associated with higher revenues.

Types of Relationships in Economic Data

1. Positive (Direct) Relationship

• Both variables move in the same direction.

• Graph slopes upward.

• Example: As income increases, expenditure also increases.

2. Negative (Inverse) Relationship

• Variables move in opposite directions.

• Graph slopes downward.

• Example: As price increases, quantity demanded decreases (law of demand).

3. Maximum or Minimum

• Some relationships have a peak (maximum) or a trough (minimum).

• These relationships are positive over part of their range and negative over another part.

4. No Relationship (Unrelated Variables)

• Variables do not move together in any systematic way.

• Points on the graph appear scattered without a discernible pattern.

Slope of a Relationship

Definition

• The slope measures the rate at which the variable on the y-axis changes with respect to the variable on the x-axis.

• Mathematically, slope is calculated as:

• Where is the change in the y-variable and is the change in the x-variable.

Slope of a Straight Line

• The slope is constant along a straight line.

• "Rise over run" method: the vertical change divided by the horizontal change.

• Positive slope: line slopes upward; negative slope: line slopes downward.

Slope of a Curved Line

• The slope varies at different points along the curve.

• At a Point: The slope at a specific point is the slope of the tangent line at that point.

• Across an Arc: The average slope between two points is the slope of the straight line connecting them.

Graphing Relationships Among More Than Two Variables

Ceteris Paribus

• When analyzing more than two variables, economists use the ceteris paribus assumption, meaning "all other things being equal." This allows the relationship between two variables to be isolated.

Example: Ice Cream Consumption

• Holding temperature constant at 21°C, a price of $2.75 leads to 10 litres consumed.

• Holding temperature constant at 32°C, the same price leads to 20 litres consumed.

• When temperature increases, the entire demand curve shifts to the right, indicating higher consumption at every price.

Movements Along vs. Shifts of a Curve

• Movement along a curve: Caused by a change in the variable on the x-axis (e.g., price).

• Shift of a curve: Caused by a change in a third variable held constant (e.g., temperature).

Additional info: These graphical concepts are foundational for understanding demand and supply analysis, elasticity, and other core microeconomic models.