Send any friend a story As a subscriber, you have 10 gift articles to give each . We have chosen intervals of 10 passengers on the horizontal axis and $100 on the vertical axis. Relationships Graphs in economics can show the relationship between two variables. Here's what to know. Economists do not figure out the answer to the problem first and then draw the graph to illustrate. We have a shift in the curve. With 10 passengers, for example, the club’s revenue was $300 at point B on R1. The club’s only revenue now comes from the $10 it charges to each passenger. Canceling games reduced his earnings, so the number of games canceled is the independent variable and goes on the horizontal axis. Notice also that R1 intersects the vertical axis at $200 (point A). Demand curves are used to determine the relationship between price and quantity, and follow the law of . 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. Draw a line through the points you have plotted. The new curve is labeled R2. It pictures the economy as consisting of two groups—households and firms—that interact in two markets: the goods and services market in which firms sell and households buy and the labor market in which households sell labor to business firms or other employees. Economists carry a set of theories in their heads like a carpenter carries around a toolkit. This allows us to expand the scale of the axis over the range from $10,000,000 to $18,000,000. But with 10 passengers, the club’s revenue would rise from $300 (point B on R1) to $500 (point B′ on R4). Start with storytelling Zoom out for a moment: what is the overall economic story being portrayed in the graph? In Panel (b) we see that the original curve relating club revenue to the number of passengers has shifted down. Outcome: Graphs in Economics | Macroeconomics The table relates various combinations of the number of passengers and club revenues. Watch this video about John Maynard Keynes and his influence on economics. 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. In this section, we will see how to compute the slope of a curve. We have data for two points, A and B. Point A does not change; the club’s revenue with zero passengers is unchanged. Understand how graphs show the relationship between two or more variables and explain how a graph elucidates the nature of the relationship. 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. If we know the values of two of the three, we can compute the third. In this course, we will mostly use graphs.) 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. Let us change one. These lines, called gridlines, will help us in Step 2. Figure 35.3 “Reading and Using Equations” provides a short review of working with equations. The Ultimate AP Macroeconomics Cheat Sheet (Graphs Included!) But a contract dispute between owners and players resulted in the cancellation of 32 games. In the table, each combination is assigned a letter (A, B, etc. A graph is a pictorial representation of the relationship between two or more variables. The greater the slope of a positively sloped curve, the steeper it will be. We draw a line that passes through points A through E. Our curve shows club revenues; we shall call it R1. We begin with the first row, A, corresponding to zero passengers and club revenue of $200, the payment from student government. We could easily add details to this basic model if we wanted to introduce more real-world elements, like financial markets, governments, and interactions with the rest of the globe (imports and exports). The fact that it is positive suggests a positive relationship between revenue per trip and the number of passengers riding the bus. The slope increases to $30 per passenger—the new price of a ticket. That tells us the curve is linear, which, of course, we can see—it is a straight line. Step 3. A shift in a curve implies new values of one variable at each value of the other variable. With 10 passengers, for example, the club’s revenue was $300 at point B on R1. Want to cite, share, or modify this book? Notice that this time the slope is negative, hence the downward-sloping curve. This is a movement along a curve; the curve itself does not shift. Figure 35.5 Canceling Games and Reducing Shaquille O’Neal’s Earnings. The construction sector's NSA U rate in May was 3.5%, down from 4.1% in April and below May 2022's 3.8%. This point shows that zero passengers result in club revenues of $200. Arrows “C” and “D” represent the two sides of the factor market. The math behind the economics: reading. Step 1. Personal income increased $80.1 billion (0.4 percent at a monthly rate) in April, according to estimates released today by the Bureau of Economic Analysis (table 3 and table 5).Disposable personal income (DPI) increased $79.4 billion (0.4 percent) and personal consumption expenditures (PCE) increased $151.7 billion (0.8 percent).. In this example, the equation is written in words. Principles of Economics/Graphs - Wikibooks Many equations in economics begin in the form of Equation 21.1, with the statement that one thing (in this case the slope) equals another (the vertical change divided by the horizontal change). A curve with a negative slope is always downward sloping. The final step is to draw the curve that shows the relationship between the number of passengers who ride the bus and the club’s revenues from the trip. It is a diagram showing how two or more sets of data or variables are related to one another. The number of passengers thus goes on the horizontal axis; the club’s revenue from a trip goes on the vertical axis. 0:01 / 12:27 How to understand graphs in Economics!!! Arrow “C” indicates this. What Is Economics, and Why Is It Important? In economics, the inflation rate is a measure of the change in price level over time. Reading: Types of Graphs | Microeconomics Textbook content produced by OpenStax is licensed under a Creative Commons Attribution License . 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”. We have applied the definition of the slope of a curve to compute the slope of R1 between points B and D. That same definition is given in Equation 35.1. prices of other goods, labor available for production, etc.) In the diagram, firms produce goods and services, which they sell to households in return for revenues. The old curve is shown in light purple. In drawing a graph showing numeric values, we also need to put numbers on the axes. Next we will turn to nonlinear ones. What are the units of each? Firms produce and sell goods and services to households in the market for goods and services (or product market). What is the slope of the curve in Figure 21.5 “Canceling Games and Reducing Shaquille O’Neal’s Earnings”? We begin with the first row, A, corresponding to zero passengers and club revenue of $200, the payment from student government. A negative relationship is one in which two variables move in opposite directions. A movement along a curve is a change from one point on the curve to another that occurs when the dependent variable changes in response to a change in the independent variable. Equation 35.1 is the first equation in this text. We have data for two points, A and B. The slope of this curve is the price per passenger. Does your graph suggest a positive or a negative relationship? The rule that the independent variable goes on the horizontal axis and the dependent variable goes on the vertical usually holds, but not always. We’d love your input. Of course, in the real world, there are many different markets for goods and services and markets for many different types of labor. How To Read Graphs - Public Goods - Hayden Economics In return, firms pay for the inputs (or resources) they use in the form of wages and other factor payments. Notice also that R1 intersects the vertical axis at $200 (point A). In the table, each combination is assigned a letter (A, B, etc. 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. The axes should be carefully labeled to reflect what is being measured on each axis. Want to create or adapt books like this? A shift in the curve implies new values of one variable at each value of the other variable. We have examined both positive and negative relationships. The vertical change between points A and B equals -$6,720,000. The slope of this curve tells us the amount by which revenues rise with an increase in the number of passengers. The change in the vertical axis equals $200. The slope of O’Neal’s salary curve is also constant. The change in the vertical axis equals $200. This section defines those rules and explains how to draw a graph. Figure 21.4 Computing the Slope of a Curve. The club thus would receive $200 even if no passengers wanted to ride on a particular day. In this course, we will mostly use graphs.) A theory is a simplified representation of how two or more variables interact with each other. The axes should be carefully labeled to reflect what is being measured on each axis. But with 10 passengers, the club’s revenue would rise from $300 (point B on R1) to $500 (point B′ on R4). They analyze issues and problems using economic theories that are based on particular assumptions about human behavior. A curve is said to rotate when a single point remains fixed while other points on the curve move; a rotation always changes the slope of a curve. Better yet, draw the axes for yourself on a sheet of graph paper and plot the curve. In this example, let's say the economy can produce: 200 guns if it produces only guns, as represented by the point (0,200) 100 pounds of butter and 190 guns, as represented by the point (100,190) During the 1998–1999 season, O’Neal was the center for the Los Angeles Lakers. (i.e. Households pay for goods and services, which becomes the revenues to firms. We can plot these values in our graph. then you must include on every digital page view the following attribution: Use the information below to generate a citation. How to understand graphs in Economics!!! Define the slope of a curve. These lines, called gridlines, will help us in Step 2. When the curve showing the relationship between two variables has a constant slope, we say there is a linear relationship between the variables. 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? Chapter 1: Economics: The Study of Choice, Chapter 2: Confronting Scarcity: Choices in Production, Chapter 4: Applications of Demand and Supply, Chapter 5: Macroeconomics: The Big Picture, Chapter 6: Measuring Total Output and Income, Chapter 7: Aggregate Demand and Aggregate Supply, Chapter 9: The Nature and Creation of Money, Chapter 10: Financial Markets and the Economy, Chapter 13: Consumptions and the Aggregate Expenditures Model, Chapter 14: Investment and Economic Activity, Chapter 15: Net Exports and International Finance, Chapter 17: A Brief History of Macroeconomic Thought and Policy, Chapter 18: Inequality, Poverty, and Discrimination, Chapter 20: Socialist Economies in Transition, Appendix B: Extensions of the Aggregate Expenditures Model, Figure 21.3 “Reading and Using Equations”, Figure 21.4 “Computing the Slope of a Curve”, Figure 21.5 “Canceling Games and Reducing Shaquille O’Neal’s Earnings”, Figure 21.6 “Shifting a Curve: An Increase in Revenues”, Figure 21.7 “Shifting a Curve: A Reduction in Revenues”, Next: Appendix B: Extensions of the Aggregate Expenditures Model, Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License. It's important to feel comfortable with the way graphs work before using them to understand new concepts. Zoom out for a moment: what is the overall economic story being portrayed in the graph? Chapter 1: Economics: The Study of Choice, Chapter 2: Confronting Scarcity: Choices in Production, Chapter 4: Applications of Demand and Supply, Chapter 5: Elasticity: A Measure of Response, Chapter 6: Markets, Maximizers, and Efficiency, Chapter 7: The Analysis of Consumer Choice, Chapter 9: Competitive Markets for Goods and Services, Chapter 11: The World of Imperfect Competition, Chapter 12: Wages and Employment in Perfect Competition, Chapter 13: Interest Rates and the Markets for Capital and Natural Resources, Chapter 14: Imperfectly Competitive Markets for Factors of Production, Chapter 15: Public Finance and Public Choice, Chapter 16: Antitrust Policy and Business Regulation, Chapter 18: The Economics of the Environment, Chapter 19: Inequality, Poverty, and Discrimination, Chapter 20: Macroeconomics: The Big Picture, Chapter 21: Measuring Total Output and Income, Chapter 22: Aggregate Demand and Aggregate Supply, Chapter 24: The Nature and Creation of Money, Chapter 25: Financial Markets and the Economy, Chapter 28: Consumption and the Aggregate Expenditures Model, Chapter 29: Investment and Economic Activity, Chapter 30: Net Exports and International Finance, Chapter 32: A Brief History of Macroeconomic Thought and Policy, Chapter 34: Socialist Economies in Transition, Figure 35.3 “Reading and Using Equations”, Figure 35.4 “Computing the Slope of a Curve”, Figure 35.5 “Canceling Games and Reducing Shaquille O’Neal’s Earnings”, Figure 35.6 “Shifting a Curve: An Increase in Revenues”, Figure 35.7 “Shifting a Curve: A Reduction in Revenues”, Next: Appendix A.2: Nonlinear Relationships and Graphs without Numbers, Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License. Assuming that his earnings fell by $210,000 per game canceled, his earnings for the season were reduced to $10,500,000 by the cancellation of 32 games (point B). What's Not to Like About May's U.S. Labor Market Report? Ask the Fed Where graphs . Watch this video to take a closer look at graphs and how variables can be represented in graph form. Do both variables affect each other? Reading down from point B, we see that it shows 10 passengers. The slope of R4 is $30 per passenger. Notice that in Figure 35.2 “Plotting a Graph” the origin has a value of zero for each variable. (Do not worry. Because the slope of this curve is $10/passenger between any two points on the curve, the relationship between club revenue per trip and the number of passengers is linear. 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 show the relationship between the number of games canceled and O’Neal’s 1998–1999 basketball earnings graphically in Figure 21.5 “Canceling Games and Reducing Shaquille O’Neal’s Earnings”. The slope between D and E is 0.002 (slope equals vertical change/horizontal change = 0.20/100). The slope between A and B is −0.002 (slope = vertical change/horizontal change = −0.20/100). Now that you know the "parts" of a graph, let's turn to the equation for a line: y = mx + b In any equation for a line, m is the slope and b is the y-intercept. The new combinations are shown as A″ – E″. Point A does not change; the club’s revenue with zero passengers is unchanged. Passengers generate revenue, so we can consider the number of passengers as the independent variable and the club’s revenue as the dependent variable. In this case, the slope tells us the rate at which O’Neal lost income as games were canceled. A positive relationship between two variables is one in which both variables move in the same direction. Mr. O’Neal’s salary worked out to roughly $210,000 per game, so the labor dispute cost him well over $6 million. The specific things you'll learn in this section include the following: Explain how a graph shows the relationship between two variables A graph shows a relationship between two or more variables. Arrows A and B represent the two sides of the product market. Keynes (Figure 1.6) famously wrote in the introduction to a fellow economist’s book: “[Economics] is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions.” In other words, economics teaches you how to think, not what to think. This book uses the Those values are, of course, the values given for combination B in the table. 2.3 Applications of the Production Possibilities Model, 4.2 Government Intervention in Market Prices: Price Floors and Price Ceilings, 5.2 Responsiveness of Demand to Other Factors, 7.3 Indifference Curve Analysis: An Alternative Approach to Understanding Consumer Choice, 8.1 Production Choices and Costs: The Short Run, 8.2 Production Choices and Costs: The Long Run, 9.2 Output Determination in the Short Run, 11.1 Monopolistic Competition: Competition Among Many, 11.2 Oligopoly: Competition Among the Few, 11.3 Extensions of Imperfect Competition: Advertising and Price Discrimination, 14.1 Price-Setting Buyers: The Case of Monopsony, 15.1 The Role of Government in a Market Economy, 16.1 Antitrust Laws and Their Interpretation, 16.2 Antitrust and Competitiveness in a Global Economy, 16.3 Regulation: Protecting People from the Market, 18.1 Maximizing the Net Benefits of Pollution, 20.1 Growth of Real GDP and Business Cycles, 22.2 Aggregate Demand and Aggregate Supply: The Long Run and the Short Run, 22.3 Recessionary and Inflationary Gaps and Long-Run Macroeconomic Equilibrium, 23.2 Growth and the Long-Run Aggregate Supply Curve, 24.2 The Banking System and Money Creation, 25.1 The Bond and Foreign Exchange Markets, 25.2 Demand, Supply, and Equilibrium in the Money Market, 26.1 Monetary Policy in the United States, 26.2 Problems and Controversies of Monetary Policy, 26.3 Monetary Policy and the Equation of Exchange, 27.2 The Use of Fiscal Policy to Stabilize the Economy, 28.1 Determining the Level of Consumption, 28.3 Aggregate Expenditures and Aggregate Demand, 30.1 The International Sector: An Introduction, 31.2 Explaining Inflation–Unemployment Relationships, 31.3 Inflation and Unemployment in the Long Run, 32.1 The Great Depression and Keynesian Economics, 32.2 Keynesian Economics in the 1960s and 1970s, 32.3. If done well, this enables the analyst to understand the issue and any problems around it. The slope of a curve equals the ratio of the change in the value of the variable on the vertical axis to the change in the value of the variable on the horizontal axis, measured between two points on the curve. Notice that there are breaks in both the vertical and horizontal axes of the grid. citation tool such as, Authors: Steven A. Greenlaw, David Shapiro, Daniel MacDonald. If so, in which direction does the relationship flow? The change in the horizontal axis when we go from B to D thus equals 20 passengers. How do we interpret supply and demand graphs A variable is simply a quantity whose value can change. What information is being described on the x-axis and the y-axis? Understanding and creating graphs are critical skills in macroeconomics. How To Organize Economies: An Overview of Economic Systems, Introduction to Choice in a World of Scarcity, How Individuals Make Choices Based on Their Budget Constraint, The Production Possibilities Frontier and Social Choices, Confronting Objections to the Economic Approach, Demand, Supply, and Equilibrium in Markets for Goods and Services, Shifts in Demand and Supply for Goods and Services, Changes in Equilibrium Price and Quantity: The Four-Step Process, Introduction to Labor and Financial Markets, Demand and Supply at Work in Labor Markets, The Market System as an Efficient Mechanism for Information, Price Elasticity of Demand and Price Elasticity of Supply, Polar Cases of Elasticity and Constant Elasticity, How Changes in Income and Prices Affect Consumption Choices, Behavioral Economics: An Alternative Framework for Consumer Choice, Production, Costs, and Industry Structure, Introduction to Production, Costs, and Industry Structure, Explicit and Implicit Costs, and Accounting and Economic Profit, How Perfectly Competitive Firms Make Output Decisions, Efficiency in Perfectly Competitive Markets, How a Profit-Maximizing Monopoly Chooses Output and Price, Introduction to Monopolistic Competition and Oligopoly, Introduction to Monopoly and Antitrust Policy, Environmental Protection and Negative Externalities, Introduction to Environmental Protection and Negative Externalities, The Benefits and Costs of U.S. Environmental Laws, The Tradeoff between Economic Output and Environmental Protection, Introduction to Positive Externalities and Public Goods, Wages and Employment in an Imperfectly Competitive Labor Market, Market Power on the Supply Side of Labor Markets: Unions, Introduction to Poverty and Economic Inequality, Income Inequality: Measurement and Causes, Government Policies to Reduce Income Inequality, Introduction to Information, Risk, and Insurance, The Problem of Imperfect Information and Asymmetric Information, Voter Participation and Costs of Elections, Flaws in the Democratic System of Government, Introduction to the Macroeconomic Perspective, Measuring the Size of the Economy: Gross Domestic Product, How Well GDP Measures the Well-Being of Society, The Relatively Recent Arrival of Economic Growth, How Economists Define and Compute Unemployment Rate, What Causes Changes in Unemployment over the Short Run, What Causes Changes in Unemployment over the Long Run, How to Measure Changes in the Cost of Living, How the U.S. and Other Countries Experience Inflation, The International Trade and Capital Flows, Introduction to the International Trade and Capital Flows, Trade Balances in Historical and International Context, Trade Balances and Flows of Financial Capital, The National Saving and Investment Identity, The Pros and Cons of Trade Deficits and Surpluses, The Difference between Level of Trade and the Trade Balance, The Aggregate Demand/Aggregate Supply Model, Introduction to the Aggregate Supply–Aggregate Demand Model, Macroeconomic Perspectives on Demand and Supply, Building a Model of Aggregate Demand and Aggregate Supply, How the AD/AS Model Incorporates Growth, Unemployment, and Inflation, Keynes’ Law and Say’s Law in the AD/AS Model, Introduction to the Keynesian Perspective, The Building Blocks of Keynesian Analysis, The Keynesian Perspective on Market Forces, Introduction to the Neoclassical Perspective, The Building Blocks of Neoclassical Analysis, The Policy Implications of the Neoclassical Perspective, Balancing Keynesian and Neoclassical Models, Introduction to Monetary Policy and Bank Regulation, The Federal Reserve Banking System and Central Banks, How a Central Bank Executes Monetary Policy, Exchange Rates and International Capital Flows, Introduction to Exchange Rates and International Capital Flows, Demand and Supply Shifts in Foreign Exchange Markets, Introduction to Government Budgets and Fiscal Policy, Using Fiscal Policy to Fight Recession, Unemployment, and Inflation, Practical Problems with Discretionary Fiscal Policy, Introduction to the Impacts of Government Borrowing, How Government Borrowing Affects Investment and the Trade Balance, How Government Borrowing Affects Private Saving, Fiscal Policy, Investment, and Economic Growth, Introduction to Macroeconomic Policy around the World, The Diversity of Countries and Economies across the World, Improving Countries’ Standards of Living, Causes of Inflation in Various Countries and Regions, What Happens When a Country Has an Absolute Advantage in All Goods, Intra-industry Trade between Similar Economies, The Benefits of Reducing Barriers to International Trade, Introduction to Globalization and Protectionism, Protectionism: An Indirect Subsidy from Consumers to Producers, International Trade and Its Effects on Jobs, Wages, and Working Conditions, Arguments in Support of Restricting Imports, How Governments Enact Trade Policy: Globally, Regionally, and Nationally, The Use of Mathematics in Principles of Economics, One of the most influential economists in modern times was John Maynard Keynes. Figure 21.7 Shifting a Curve: A Reduction in Revenues. For example, which countries have larger or smaller populations? Want to create or adapt books like this? Macroeconomics Graphs Review The new revenue curve R4 is steeper than the original curve. Applying the equation, we have: [latex]Slope = \frac{vertical \: change}{horizontal \: change} = \frac{ \$ 200}{20 \: passengers} = \$ 10/passenger[/latex]. The change in the horizontal axis when we go from B to D thus equals 20 passengers. The club thus would receive $200 even if no passengers wanted to ride on a particular day.