1. 1
Analysis Toolkit
Using Graphs in Economic Analysis

2. Using Graphs in Economic Analysis
Display large quantity of data quickly
Facilitate data interpretation and analysis
Important relationships more apparent than from written descriptions or long lists of numbers

3. Two-Variable Diagrams
Variable = an entity that can assume different values.
Variable can be independent (usually represented on the X-axis) or dependent (usually represented on the Y-axis)
In microeconomics, we will study such variables as prices, quantity, revenue, cost and profit.

4. Quantities of Natural Gas Demanded at Various Prices

5. View two variables together to see if they exhibit a relationship
QD=QD(P)  P=P(QD) D
120 6
100 5 Q 80 4
Quantity
Price Q P a 60 3 b 40 2 20 1 P 1 2 3 4 5 6 7 20 40 60 80
100
120
140
Price
(a)
Quantity
(b)
If a relationship is found, say via a function QD=QD(P). the inverse function, P=P(QD), can be found by rearranging the terms.

6. Hypothetical Supply Curve
QS=QS(P)  P=P(QS) 6 5 4
Price 3 2 1 20 40 60 80
100
120
140
Quantity
What is held constant along this supply curve?

7. The Definition and Measurement of Slope
Slope = ratio of vertical change to horizontal change
Rise divided by Run=
Measure of steepness of a relationship
 Y
 X

8. The Definition and Measurement of Slope
The slope of a straight line
Negative slope = one variable rises while the other variable falls
The two variables move in opposite directions.
Positive slope = two variables rise and fall together
The two variables move in the same direction.

9. Negative Slope Y
Negative
slope X

10. Positive Slope Y
Positive
slope X

11. The Definition and Measurement of Slope
Zero slope = the variable on the horizontal axis can be any value while the variable on the vertical axis is fixed
Horizontal line
Infinite slope = the variable on the vertical axis can be any value while the variable on the horizontal axis is fixed
Vertical line

12. Zero Slope Y
Zero
slope X

13. Infinite Slope Y
Infinite
slope X

14. The Measurement of Slope
The slope of a straight line
Slope is constant along a straight line.
Slope can be measured between any two points on one axis and the corresponding two points on the other axis.

15. How to Measure Slope Y Y 3 — 10 Slope = C 11 B C 9 1 — 10 Slope = B 8X X 3 13 3 13
(a)
(b)

16. The Definition and Measurement of Slope
The slope of a curved line
Slope changes from point to point on a curved line.
Curved line bowed toward the origin has a negative slope.
Variables change in opposite directions.
Curved line bowed away from the origin has a positive slope.
Variables change in the same direction.

17. Negative Slope in Curved LinesY
Negative
slope X

18. Positive Slope in Curved LinesY
Positive
slope X

19. The Definition and Measurement of Slope
The slope of a curved line
A curved can have both a positive and negative slope depending on where on the curve is measured.
The slope at a point on a curved-line is measured by a line tangent to that point.

20. Behavior of Slope in Curved LinesY Y
Negative
slope
Positive
slope
Negative
slope
Positive
slope X X

21. How to Measure Slope at a Point on a CurveY r 8 D 7 E 6 R t F 5 C 4 G T 3 M 2 1 A B X 1 2 3 4 5 6 7 8 9 10

22. Rays Through the Origin and 45-degree Lines
Y-intercept = point at which a line touches the y axis, i.e. when x =0
X-intercept = point at which a line touches the x axis, i.e. when y =0
Ray through the origin = straight line graph with a y-intercept of zero

23. Rays through the Origin
Y =2 X
Y =X
Slope = + 2 5
Slope = + 1 4 B
Y =1 / 2 X C D 3 A 2 1 – 2
Slope = + K 1 E X 1 2 3 4 5

24. Squeezing 3 Dimensions into 2: Contour Maps
Some problems involve more than two variables
Economic “contour map” a.k.a. indifference map or level set.
Shows how variable Z changes as we change either X or Y

25. An Economic Contour Map

26. An Economic Contour MapY Z
= 40 80 Z
= 30 70 Z
= 20 Z
= 10 60 50
Yards of Cloth per Day A 40 30 B 20 10 X 10 20 30 40 50 60 70 80
Labor Hours per Day