The second combination, B, tells us that if 10 passengers ride the bus, the club receives $300 in revenue from the trip—$100 from the $10-per-passenger charge plus the $200 from student government. We can plot these values in our graph. The fact that the slope of our curve equals $10/passenger tells us something else about the curve—$10/passenger is a positive, not a negative, value. We have drawn vertical lines from each of the values on the horizontal axis and horizontal lines from each of the values on the vertical axis. The payment was $200 when we drew the original graph. The graph assumes that his earnings would have been $17,220,000 had no games been canceled (point A, the vertical intercept). We draw a line that passes through points A through E. Our curve shows club revenues; we shall call it R1. Presumably, he was able to eke out a living on his lower income, but the cancellation of games cost him a great deal. With the increased payment from the student government, its revenue with 10 passengers rises to $500 at point B′ on R2. Introductory economics courses often begin with a jargon-loaded discussion of opportunity costs and marginal benefits versus marginal costs—in other words, what is the benefit of continuing to read the rest of this post, and what else could you be doing with your time? As an example of a graph of a negative relationship, let us look at the impact of the cancellation of games by the National Basketball Association during the 1998–1999 labor dispute on the earnings of one player: Shaquille O’Neal. This method is quickly growing in popularity among students and faculty across all course formats: traditional, online, flipped, and hybrid. The curve’s downward slope tells us there is a negative relationship between price and the quantity of gasoline people are willing and able to buy. Unit 2: Economic Indicators and the Business Cycle. As an example of a graph of a negative relationship, let us look at the impact of the cancellation of games by the National Basketball Association during the 1998–1999 labor dispute on the earnings of one player: Shaquille O’Neal. Learn more about how Pressbooks supports open publishing practices. Figure 21.4 “Computing the Slope of a Curve” shows R1 and the computation of its slope between points B and D. Point B corresponds to 10 passengers on the bus; point D corresponds to 30. What information is being described on the x-axis and the y-axis? The point where two lines on a graph cross is called an intersection point. Presumably, he was able to eke out a living on his lower income, but the cancellation of games cost him a great deal. A change from one point on the curve to another produces a movement along the curve in the graph. The vertical change between points A and B equals -$6,720,000. Perhaps it is an important time right now to start thinking about other measures - increasing inspections at the U.S.-Mexico border, even if this will have economic consequences for Mexico, also . We have now seen how to draw a graph of a curve, how to compute its slope, and how to shift and rotate a curve. The payment was $200 when we drew the original graph. They relate the values of the variables on the two axes to each other. © Dec 2, 2022 OpenStax. The shifts in Figure 21.6 “Shifting a Curve: An Increase in Revenues” and Figure 21.7 “Shifting a Curve: A Reduction in Revenues” left the slopes of the revenue curves unchanged. Strictly speaking, a theory is a more abstract representation, while a model is a more applied or empirical representation. By the end of this section, you will be able to: John Maynard Keynes (1883–1946), one of the greatest economists of the twentieth century, pointed out that economics is not just a subject area but also a way of thinking. are not subject to the Creative Commons license and may not be reproduced without the prior and express written Notice that there are breaks in both the vertical and horizontal axes of the grid. The slope of R1 can be considered a constant, which suggests that it is a straight line. What is the slope between D and E? Plot these points in the grid provided and label each point with the letter associated with the combination. Suppose the school’s student government increases the payment it makes to the club to $400 for each day the trip is available. The point at which the axes intersect is called the origin of the graph. There is a positive relationship between club revenues and passengers on the bus. It’s important to know the terminology of graphs in order to understand and manipulate them. A scatter diagram shows individual points relating values of the variable on one axis to values of the variable on the other. Between A and C? Similarly, the y-intercept is the value of y when x = 0. We begin our graph in Panel (a) of Figure 35.2 “Plotting a Graph” by drawing two axes to form a right angle. Its upward slope tells us there is a positive relationship between price per gallon and the number of gallons per week gas stations are willing to sell. We have data for two points, A and B. A downward-sloping curve suggests a negative relationship between two variables. We can draw a line between these two points to show the relationship between games canceled and O’Neal’s 1998–1999 earnings from basketball. As we travel down and to the right along the curve, the number of games canceled rises and O’Neal’s salary falls. In this course, the most common way you will encounter economic models is in graphical form. Adding a passenger adds $10 to the club’s revenues. Figure 21.5 Canceling Games and Reducing Shaquille O’Neal’s Earnings. At 58 units we're at 86. Figure 21.3 “Reading and Using Equations” provides a short review of working with equations. Plot AS on your graph using the values for price level and aggregate supply on the chart. Recall that, when two variables are related, the dependent variable is the one that changes in response to changes in the independent variable. Assuming that his salary for the season fell by $210,000 for each game canceled, the cancellation of 32 games during the dispute between NBA players and owners reduced O’Neal’s earnings to $10,500,000 (point B). A graph is a visual representation of numerical information. The club’s revenues from any single day thus equal $200 plus $10 times the number of passengers. The vertical intercept in this case shows the revenue the club would receive on a day it offered the trip and no one rode the bus. An intercept is where a line on a graph crosses ("intercepts") the x-axis or the y-axis. A variable is simply a quantity whose value can change. When starting to study economics, immerse yourself in existing academic literature on the topic. Point B corresponds to club revenues of $300; point D corresponds to club revenues of $500. However, there are three main types of economics graphs, and they include line, bar, and pie graphs. ); we will use these letters when we transfer the information from the table to a graph. Define the slope of a curve. Passengers generate revenue, so we can consider the number of passengers as the independent variable and the club’s revenue as the dependent variable. The club leases the bus and charges $10 per passenger for a round trip to the ski area. In the table, each combination is assigned a letter (A, B, etc. Plot these points in the grid provided and draw a curve through the points you have drawn. The fact that it is positive suggests a positive relationship between revenue per trip and the number of passengers riding the bus. Distinguish between a movement along a curve, a shift in a curve, and a rotation in a curve. This curve, by the way, is a demand curve (the next one is a supply curve). The shifts in Figure 35.6 “Shifting a Curve: An Increase in Revenues” and Figure 35.7 “Shifting a Curve: A Reduction in Revenues” left the slopes of the revenue curves unchanged. As such, they can be used to answer questions. If so, in which direction does the relationship flow? Canceling games reduced his earnings, so the number of games canceled is the independent variable and goes on the horizontal axis. The slope between A and E thus equals $400/(40 passengers) = $10/passenger. To illustrate this, we draw a downward sloping demand curve (blue) relating price to the quantity of sneakers demanded. The slope of a curve describing a negative relationship is always negative. A negative relationship is one in which two variables move in opposite directions. This means the club’s revenues will remain $200 if it has no passengers on a particular trip. Our mission is to improve educational access and learning for everyone. Points in a graph have a special significance. Understand how graphs show the relationship between two or more variables and explain how a graph elucidates the nature of the relationship. What is the slope of the curve in Figure 21.5 “Canceling Games and Reducing Shaquille O’Neal’s Earnings”? The club’s only revenue from a trip now comes from its $10/passenger charge. Take the market for any good – let’s say running sneakers. With 20 passengers, the club’s revenue will now equal $800 (point C′ on R4). This version of the circular flow model is stripped down to the essentials, but it has enough features to explain how the product and labor markets work in the economy. Economists express theories as diagrams, graphs, or even as mathematical equations. The procedure for showing the relationship between two variables, like the ones in Figure 21.1 “Ski Club Revenues”, on a graph is illustrated in Figure 21.2 “Plotting a Graph”. O’Neal’s salary with the Lakers in 1998–1999 would have been about $17,220,000 had the 82 scheduled games of the regular season been played. We often refer to the vertical or horizontal intercept of a curve; such intercepts can play a special role in economic analysis. Next, we shall see how the slope of a curve changes when we rotate it about a single point. Next we can place each of these points on a graph. The slope of this curve tells us the amount by which revenues rise with an increase in the number of passengers. Figure 21.4 Computing the Slope of a Curve. consent of Rice University. A curve whose slope is positive is upward sloping. We will look at a graph showing a negative relationship between two variables in the next section. Select two points; we have selected points B and D. The slope equals the vertical change divided by the horizontal change between the two points. The change in the vertical axis equals $200. When we draw a graph showing the relationship between two variables, we make an important assumption. That means there was a linear relationship between games canceled and his 1998–1999 basketball earnings. Learn all about the fields of economics, microeconomics, macroeconomics, finance, and capital markets with hundreds of videos, articles, and practice exercises. The graph in Panel (b) is called a scatter diagram. In this example, each time the x term increases by 1 (the run), the y term rises by 3. Notice that we can compute the slope of R1 between any two points on the curve and get the same value; the slope is constant. The two variables shown in the table are the number of passengers taking the bus on a particular day and the club’s revenue from that trip. The change in the horizontal axis is from zero games canceled at A to 32 games canceled at B. citation tool such as, Authors: Steven A. Greenlaw, David Shapiro, Daniel MacDonald. Next, we shall see how the slope of a curve changes when we rotate it about a single point. Send any friend a story As a subscriber, you have 10 gift articles to give each . A positive relationship between two variables is one in which both variables move in the same direction. When they see an economic issue or problem, they go through the theories they know to see if they can find one that fits. If we know the values of two of the three, we can compute the third. We assume that all other variables that might affect the relationship between the variables in our graph are unchanged. When the curve showing the relationship between two variables has a constant slope, we say there is a linear relationship between the variables. That tells us the curve is linear, which, of course, we can see—it is a straight line. What is the slope of the curve in Figure 35.5 “Canceling Games and Reducing Shaquille O’Neal’s Earnings”? (slope = vertical change/horizontal change = −0.20/100). A negative relationship is one in which two variables move in opposite directions. In the computation of slopes that follow, for example, we will use values for the two variables on the right side of the equation to compute the slope. "Domestic demand weakened recently, partly due to [the . It is important that you understand how to use them. The slope of this curve is the price per passenger. Each axis will represent a variable. . Creative Commons Attribution License A graph is a visual representation of numerical information. The key to understanding graphs is knowing the rules that apply to their construction and interpretation. Figure 35.7 Shifting a Curve: A Reduction in Revenues. Suppose, for example, the ski club changes the price of its bus rides to the ski area to $30 per trip, and the payment from the student government remains $200 for each day the trip is available. Want to create or adapt books like this? Are these two variables related or is this simply a spurious correlation? The slope between A and B is −0.002 (slope = vertical change/horizontal change = −0.20/100). Notice that R1 is an upward-sloping straight line. The curve R1 shifts upward by $200 as a result of the increased payment. https://openstax.org/books/principles-economics-3e/pages/1-introduction, https://openstax.org/books/principles-economics-3e/pages/1-3-how-economists-use-theories-and-models-to-understand-economic-issues, Creative Commons Attribution 4.0 International License, Explain the importance of economic theories and models, Describe goods and services markets and labor markets. Economists do not figure out the answer to the problem first and then draw the graph to illustrate. When we travel up in a graph, we are traveling with respect to values on the vertical axis. China's factory activity shrank faster than expected in May on weakening demand, heaping pressure on policymakers to shore up a patchy economic recovery and knocking Asian financial markets lower. The point to its left has only half the extent . Do both variables affect each other? The procedure for showing the relationship between two variables, like the ones in Figure 35.1 “Ski Club Revenues”, on a graph is illustrated in Figure 35.2 “Plotting a Graph”. Now suppose you are given the following information about the relationship between price per gallon and the number of gallons per week gas stations in the community are willing to sell. Understand how graphs show the relationship between two or more variables and explain how a graph elucidates the nature of the relationship. The new curve is shown in dark purple in Panel (b). The point at the top right indicates Q* quantity of a good each being sold at price P*; the horizontal and vertical lines are there for facilitation/marker purposes. In this example, the equation is written in words. In this course, we will mostly use graphs.) In April 2023, prices had increased by 4.9 percent compared to April 2022 according to the 12-month percentage change in the consumer price index - the monthly inflation rate for goods and services in the United States. Here is the first graph. The purpose of a model is to take a complex, real-world situation and pare it down to the essentials. Arrows “C” and “D” represent the two sides of the factor market. With 20 passengers, the club’s revenue will now equal $800 (point C′ on R4). This is a movement along a curve; the curve itself does not shift. prices of other goods, labor available for production, etc.) Because the curve is linear, the slope is the same between any two points, for example, between E and F and between D and F. Principles of Economics by University of Minnesota is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted. The reason is that if x = 0, the b term will reveal where the line intercepts, or crosses, the y-axis. Consider, for example, points A and E. The vertical change between these points is $400 (we go from revenues of $200 at A to revenues of $600 at E). To check your understanding of these steps, we recommend that you try plotting the points and drawing R1 for yourself in Panel (a). Want to cite, share, or modify this book? We recommend using a (slope = vertical change/horizontal change = −0.20/100). The following table shows the relationship between the number of gallons of gasoline people in a community are willing and able to buy per week and the price per gallon.
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