Graphs in Economics

CHAPTER 1
APPENDIX
GRAPHS IN ECONOMICS
Objectives
 After studying this appendix, you will be able to:
 Make and interpret a scatter diagram
 Identify linear and nonlinear relationships and relationships that have a
maximum and a minimum
 Define and calculate the slope of a line
 Graph relationships among more than two variables
Graphing Data
• A graph reveals a relationship.

• A graph represents a quantity as a
distance on a line.
• A two-variable graph uses two
perpendicular scale lines.
• The two scale lines are perpendicular
to each other are called axes.
• The vertical line is the y-axis.
• The horizontal line is the x-axis.
• Each axis has a zero point, which is
shared by the two axes and called the
origin.
Graphing Data
 There are three types of graphs used by Economists to

illustrate relationships between variables.
 Time-series graphs
 Cross-section graphs
 Scatter diagrams
Graphing Data
 Time-Series Graphs
 A time-series graph measures time (for example, months
or years) along the x-axis and the economic indicator
representing variable or variables in which we are
interested along the y-axis.
 In short time series graph shows how a variable changes
over time.
Graphing Data
Graphing Data
 Cross-Section Graphs
 A cross-section graph shows the values of a variable for
different groups in a population at a point in time.
Graphing Data
Graphing Data
 Scatter Diagrams
 A scatter diagram is a graph that plots the value of one
variable against the value of another variable for a
number of different values of each variable.
 A scatter diagram plots the value of one variable on the x-
axis and the value of another variable on the y-axis.
 Such a graph reveals whether a relationship exists
between two variables and describes their relationship.
 The three scatter diagrams on the next slide show
examples of variables.
Graphing Data
Graphing Data
Graphing Data
 Correlation
A scatter diagram that
 shows a clear relationship between two variables, such
tells us that the two variables have a high correlation.
 When a high correlation is present, we can predict the
value of one variable from the value of the other variable.
Graphs Used in Economic
Models
 Graphs are used in economic models to show the
relationship between variables.
 The patterns to look for in graphs are the four cases in
which:
 Variables move in the same direction
 Variables move in opposite directions
 Variables have a maximum or a minimum
 Variables are unrelated
Models
 Variables That Move in the Same Direction
 A relationship between two variables that move in the
same direction is called a positive relationship or a direct
relationship.
 A line that slopes upward shows that economic variables
are positively related or economic indicators has a positive
relationship.
 If the relationship is illustrated by a straight line is it is
called a linear relationship.
 The three graphs on the next slide show positive
relationships.
Models
Models
 Variables That Move in Opposite Directions
 If the relationship between two variables that move in
opposite directions there is a negative relationship or an
inverse relationship exists between those variables.
 A negative relationship is illustrated by a line that slopes
downward.
 The three graphs on the next slide show negative
relationships.
Models
Models
 Variables That Have a Maximum or a Minimum
 The two graphs on the next slide show relationships that
have a maximum and a minimum.
 Relationships
 are positive over part of their range and negative over the
following part.
 Or
 are negative over part of their range and positive over the
following part.
Models
Models
 Variables That are Unrelated
 Sometimes two variables are unrelated so there is no
relationship exist between them.
 There are 2 examples of variables that are unrelated
shown in the next slide.
Models
The Slope of a Relationship
 The slope of a relationship is the change in the value of the variable measured
on the y-axis divided by the change in the value of the variable measured on
the x-axis.
 We use the Greek letter  (capital delta) to represent “change in.”
 So y means the change in the value of the variable measured on the y-axis
and x means the change in the value of the variable measured on the x-axis.
 The slope of the relationship is y/x.
The Slope of a Straight

Line
The slope of a straight line
is constant.
Graphically, the slope is
calculated as the “rise”
over the “run.”
The slope is positive if the
line is upward sloping.
The slope is negative if the

line is downward sloping.
 The Slope of a Curved Line

 The slope of a curved line is not constant all over the
curve so it depends on where along the curve it is
calculated.
 The slope of a curved line is calculated either at a point or
across an arc.
Slope at a Point
The slope of a curved line
at a point is equal to the
slope of a straight line that
is the tangent to that point.
Here, we calculate the
slope of the curve at point
A.
Slope Across an Arc

The average slope of a
curved line across an arc
is equal to the slope of a
straight line that joins the
endpoints of the arc.
Here, we calculate the
average slope of the curve
along the arc BC.
Graphing Relationships Among More
Than Two Variables
The relationship between two of the variables is plotted by

holding other variables constant—by using ceteris paribus.
The followings give for relationships among three
variables.

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CHAPTER 1

• A graph reveals a relationship.

 There are three types of graphs used by Economists to

The Slope of a Straight

The slope is negative if the

 The Slope of a Curved Line

Slope Across an Arc

The relationship between two of the variables is plotted by

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