Applying graphs to economics

Applying graphs to economics

KEY CONCEPTS

•Why use graphs in economics?

•What is a direct relationship?

•What is an inverse relationship?

•What is an independent relationship between two variables?

•How do we measure the slope of a line?

•How do graphs show three-variable relationships?

GRAPHS IN ECONOMICS

A DIRECT RELATIONSHIP

•A direct relationship is a positive association between two variables.

•When one variable increases, the other also increases.

•When one variable decreases, the other also decreases.

•Note the line on the next slide has a positive slope.

A DIRECT RELATIONSHIP

AN INVERSE RELATIONSHIP

•An inverse relationship is a negative association between two variables.

•When one variable increases, the other decreases.

•When one variable decreases, the other increases.

•Note the line on the next slide has a negative slope.

AN INDEPENDENT RELATIONSHIP

•An independent relationship is where  there is no (zero) association between two variables.

•When one variable changes, the other remains unchanged.

AN INDEPENDENT RELATIONSHIP

THE SLOPE OF A STRAIGHT 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).

•Slope  = rise/run

  = Dvertical axis/Dhorizontal axis

  = DY/DX

THE SLOPE OF A CURVE

•A ‘straight-line’ relationship is a linear relationship.

•The slope of a curve changes from one point on the curve to another.

•To determine the slope of a curve at any point, draw a tangent to the line at that point, and measure the slope of the tangent.

THE SLOPE OF A CURVE

INTRODUCING A THIRD VARIABLE

•How can a model drawn in two dimensions show the impact of changes in a third variable?

•Remember Ceteris Paribus:

–We must distinguish between movements and shifts.

•Movements along a graph show changes in one variable on the graph’s axes

•Shifts show changes in other variables.

A THREE-VARIABLE RELATIONSHIP

A HINT FOR STUDYING GRAPHS