Economics ECO 211

Appendix Chp. 1 Applying Graphs to Economics

Key Concepts Practice Quiz

Importance of Graphs in Economics

In economics, graphs are used to visually illustrate relationships between economic variables. The relationship is either direct (also known as a positive relationship) or inverse (also known as a negative relationship).

What assumption is always made when testing a model?

Ceteris Paribus

What is Ceteris Paribus?

A Latin phrase that means that while certain variables can change, all other things remain unchanged
If this assumption is violated, a model cannot be tested.

Computer at Different Annual Incomes

Personal Expenditure Annual Income

Example: Expenditure for Personal

$1,000 $2,000 $3,000 $4,000

$10,000 $20,000 $30,000 $40,000

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Ceteris paribus

Y
4 3

A direct relationship

C
B
Y=1 X=10

2
1

A 10 20

30 40

X
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Graphs
A direct relationship between two variables means that as one variable increases this causes the other variable to also increase in value; and vice versa. A direct relationship is illustrated graphically as an upward sloping, or positively sloped line or curve. An inverse relationship between two variables means that as one variable increases this causes the other variable to decrease in value; and vice versa. An inverse relationship is illustrated graphically as a downward sloping, or negatively sloped line or curve.

There is a Direct Relationship between two variables

When one increases, the other increases and vice versa
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Example 2: Quantity of Compact Discs

Consumers Purchased at Different Prices Price per compact disc Quantity of compact discs

$20
$15 $10 $5

25,000,000
50,000,000 75,000,000 100,000,000
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Ceteris paribus

Y
20 15

An inverse relationship

A B
Y=5 X=25

10
5

C D

25

50

75 100

X
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Y
20 15 10

Negative Sloping Curve

A B
Y=5 X=25

C D

5
25

50

75 100

X
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There is an Inverse Relationship between two variables

That is, When one increases, the other decreases and vice versa
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Ex.3: Expenditure for Toothpaste at Different Annual Incomes

Personal Expenditure Annual Income

$10 $20
$30 $40

$10,000 $20,000 $30,000 $40,000

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Ceteris paribus

Y
40 30

20
10

X=10 Y=0

10

20

30 40

X
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There is an Independent Relationship between two variables (No relation)

That is when one variable changes, the other variable remains unchanged
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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).
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Slope = rise/run = vertical axis/horizontal axis = Y/X

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Slope of a Curve
The slope is the change of rise over the change in run. The slope of a curve at any point is equal to the slope of the straight line drawn tangent to the curve at that point..
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Y
4 3 2

Positive slope of an upward-sloping curve

A
Y=2 X=30

1
10

20

30 40

X
20

Y
20 15

Negative slope of an downward-sloping curve

10
5

Y= -10

A
X=50

25

50

75 100

X
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Can Slope vary along a curve?

Yes, the slope of a curve can vary along the curve, as the tangent lines differ at different points of the curve.
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What can change other than price?

When income increases, for example, the whole demand curve shifts upward
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Y
20 15 10
Annual Income $60,000

Annual Income $30,000

25

50

75 100

X
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A decrease in the price per CD causes a movement downward along each curve. However, any change in the ceteris paribus, represented by the change in income will cause a shift in the curve itself. In this case, As the annual income rises, there is a shift rightward in the position of the demand curve
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Y
20 15 10
Annual Income $60,000

Annual Income $30,000

25

50

75 100

X
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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.
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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
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Appendix Quiz

1999 South-Western College Publishing

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14

Y
20 15 10

EXHIBIT A-7

D
C
5 10 15 20

X
30

1. Straight line CD in Exhibit A-7 shows that a. increasing the value of X will increase the value of Y. b. decreasing the value of X will decrease the value of Y. c. there is a direct relationship between X and Y. d. all of the above. D. As the value of X increases, the value of Y increases, and vice versa; this is called a direct relationship.
1999 South-Western College Publishing

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2. In Exhibit A-7, the slope of straight line CD is a. 3. b. 1. c. -1. d. 1/2. D. The slope of a line is measured by the rise over the run, or a change in vertical divided by a change in the horizontal. For example, as Y increases from 5 units to 15, X increases from 0 to 20. The slope is 10 divided by 20.
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3. In Exhibit A-7, the slope of straight line CD is a. positive. b. zero. c. negative. d. variable. A. When both X and Y move in the same direction, it is said that they are directly related to one another.

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20 A

EXHIBIT A-8

15
10

5
5 10

B
15 20

X
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4. Straight line AB in Exhibit A-8 shows that a. increasing the value of X reduces the value of Y. b. decreasing the value of X increases the value of Y. c. there is an inverse relationship between X and Y. d. all of the above. D. When the value of X decreases, the value of Y increases and vice versa; this shows a direct relationship between X and Y.
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5. As shown in Exhibit A-8, the slope of straight line AB a. decreases with increases in X. b. increases with increases in X. c. increases with decreases in X. d. remains constant with changes in X. D. The slope of a straight line stays the same between the two points on the line.

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6. In Exhibit A-8, the slope of straight line AB is a. 3. b. 1. c. -1. d. -5.

C. There is a one to one inverse ratio between a change in X and a change in Y. For example, as Y decreases from 20 units to 0, X increases from 0 to 20. The slope is -20 divided by 20.
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7. A shift is a curve represents a change in a. the variable on the horizontal axis. b. the variable on the vertical axis. c. a third variable that is not on either axis. d. any variable that is relevant to the relationship being graphed.

C. A shift occurs when something changes other than the price.

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8. A change in a third variable not on either axis of a graph is illustrated with a a. horizontal or vertical line. b. movement along a curve. c. shift of a curve. d. point of intersection. C. When price changes the movement is always along a stationary curve. When something changes other than price, the whole curve shifts.
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END

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