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Chapter 2 Appendix:
Graphs in Economics
Getting the Picture
Whether you’re reading about economics in the
Wall Street Journal
or in your eco-
nomics textbook, you will see many graphs. Visual images can make it much easier
to understand verbal descriptions, numerical information, or ideas. In economics,
graphs are the type of visual image used to facilitate understanding. To fully under-
stand the ideas and information being discussed, you need to be familiar with how
to interpret these visual aids. This appendix explains how graphs are constructed and
interpreted and how they are used in economics.
Graphs, Variables, and Economic Models
One reason to attend college is that a bachelor’s degree provides access to higher-paying
jobs. Additional degrees, such as MBAs or law degrees, increase earnings even more.
If you were to read an article about the relationship between educational attainment and
income, you would probably see a graph showing the income levels for workers with
different amounts of education. And this graph would depict the idea that, in general,
more education increases income. This graph, like most of those in economics, would
depict the relationship between two economic variables. A
variable
is a quantity that
can take on more than one value, such as the number of years of education a person
has, the price of a can of soda, or a household’s income.
As you learned in this chapter, economic analysis relies heavily on
models
, simpli-
fied descriptions of real situations. Most economic models describe the relationship
between two variables, simplified by holding constant other variables that may affect
the relationship. For example, an economic model might describe the relationship
between the price of a can of soda and the number of cans of soda that consumers
will buy, assuming that everything else that affects consumers’ purchases of soda
stays constant. This type of model can be described mathematically or verbally, but
illustrating the relationship in a graph makes it easier to understand. Next we show
how graphs that depict economic models are constructed and interpreted.
How Graphs Work
Most graphs in economics are based on a grid built around two perpendicular lines that
show the values of two variables, helping you visualize the relationship between them.
So a first step in understanding the use of such graphs is to see how this system works.
Two-Variable Graphs
Figure 2A-1 on page 42 shows a typical two-variable graph. It illustrates the data in the
accompanying table on outside temperature and the number of sodas a typical vendor
can expect to sell at a baseball stadium during one game. The first column shows the
values of outside temperature (the first variable) and the second column shows the
values of the number of sodas sold (the second variable). Five combinations or pairs of
the two variables are shown, each denoted by
A
through
E
in the third column.