Graphs and Their Meaning Ch1  Graphs: Used to illustrate economic models; Illustrate relationships. –Generally two variables illustrated * Consumption > as income > * Consumption > as income > *Horizontal: determining factor *Horizontal: determining factor Vertical: depends on income Vertical: depends on income Independent variable=Horiz. Independent variable=Horiz. Dependent variable=Vertical Dependent variable=Vertical ConsumptionConsumption Income Y $ A a b c d $

Graphs  Direct relationship (Positive): the two variables (consumption & income) change in the same direction. –>consumption = >income –<consumption= < income –2 variables change positively they always graph as an upsloping line.

Graphs () Inverse relationship Attendance in 1000’s Ticket Price (P) 2 Variables change in opposite directions. *Ticket prices *Ticket prices > attendance < *Inverse relationship causes the line to slope downward. “Which variable is the cause and which is the effect???” a b c d e f

Ceteris Paribus  Ceteris Paribus=“ –All other things being equal.”  Plots relationship between two variables and assumes ceteris paribus.  In reality: All “other things” are not equal –What could change attendance other than ticket prices?

Slope of Line  Slope = Vertical change/Horizontal chg. Slope= VC/HC Slope= VC/HC Between points B/C: Between points B/C: Vertical: +$50 Vertical: +$50 Horizontal: +$100 Horizontal: +$ /+100=1/2=.5 +50/+100=1/2=.5 ConsumptionConsumption Income Y A a b c

Positive Slope of Line  Slope is positive.5 because consumption and income increase in the same direction; Consumption and income are directly or positively related. –Slope of.5 tells us the following:  $1 increase in consumption for every $2 increase in income.  $2 decrease in income there will be a $1 decrease in consumption.

Negative Slope  Slope=VC/HC (Points c and d)  VC = -10 drop HC = +4 Ticket prices & Ticket prices & attendance have an attendance have an inverse relationship. inverse relationship. -10/+4=-2 ½ or /+4=-2 ½ or -2.5 What does it say? What does it say? a b c d e Attendance in 1000’s Ticket Price P

Slope and Marginal Analysis  Marginal=Adding one more/less unit.  The.5 slope shows that $.50 of extra (marginal) consumption is associated with each $1 change in income.  The -2.5 slope shows that $10 increase in ticket prices will result in a 4,000 decrease in attendance.  A $10 decrease in attendance will result in an increase in attendance.

Vertical Intercept  Vertical Intercept: of a line is the point where the line meets the vertical axis. VI=$50 VI=$50 If current income=0; still spend? If current income=0; still spend? A a b c $ Income (Y) $ $ ConsumptionConsumption

Infinite Slope  Infinite slope: Variables are unrelated or independent of one another.  Ex. The purchase of wrist watches is not related to the price of bananas.  Slope of line is parallel to vertical axis.  Same quantity of watches is purchased regardless of price of bananas. 0 Price BanPrice Ban Watches bought Slope= Infinite Slope = 0 Divorce Rate ConsumptionConsumption

Linear Relationship  If we know the vertical intercept and slope, we can describe a line in equation form.  C=a+bx  a=vertical intercept  C=consumption  b=slope of line  x=independent variable

Slope of Nonlinear Curve  Slope of straight line is the same at all points.  Slope of nonlinear line changes from point to point. Lines are called curves. Measure slope=draw line tangent to curve Measure slope=draw line tangent to curve *Slope of the curved line =slope of tangent *Slope of the curved line =slope of tangent a bb b a A B