Chapter 2A - Krugman_Econ_CH02A_045-055 9/1/04 1:52 PM Page...

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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.
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Chapter 2A - Krugman_Econ_CH02A_045-055 9/1/04 1:52 PM Page...

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