Chp1 Appendix

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EconomicsECO 211Appendix Chp. 1

Applying Graphs toEconomics

Key ConceptsPractice Quiz

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Importance of Graphs in

Economics

In economics, graphs are used to visually

illustrate relationships between economicvariables.

The relationship is either direct (also known

as a positive relationship) or inverse (also

known as a negative relationship).


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What assumption isalways made when

testing a model?

Ceteris Paribus

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What isCeteris Paribus?

A Latin phrase that means thatwhile certain variables can change,all other things remain unchanged

If this assumption is violated, a model cannotbe tested.


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Example: Expenditure for PersonalComputer at Different Annual Incomes

PersonalExpenditure

AnnualIncome

$1,000

$2,000

$3,000

$4,000

$10,000

$20,000

$30,000

$40,000

Ceteris paribus

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4

3

2

1

10 20 30 40

A

B

C

D

Y=1

X=10

Y

X

A direct relationship


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Graphs

A direct relationship between two variables means that asone variable increases this causes the other variable to alsoincrease in value; and vice versa. A direct relationship isillustrated graphically as an upward sloping, or positivelysloped line or curve.

An inverse relationship between two variables means thatas one variable increases this causes the other variable to

decrease in value; and vice versa. An inverse relationshipis illustrated graphically as a downward sloping, ornegatively sloped line or curve.

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There is aDirect Relationship

between two variablesWhen one increases,the other increasesand vice versa


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Example 2: Quantity of Compact DiscsConsumers Purchased at Different Prices

Price percompact disc

Quantity ofcompact discs

$20

$15

$10

25,000,000

50,000,000

75,000,000$5 100,000,000

Ceteris paribus

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15

10

5

25 50 75 100

A

BC

D

Y=5

X=25

An inverse relationship

X

Y


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10

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25 50 75 100

A

B

C

D

Y=5

X=25

Negative Sloping Curve

X

Y

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There is an InverseRelationship between

two variablesThat is, When one increases,the other decreases and viceversa


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Ex.3: Expenditure for Toothpaste

at Different Annual IncomesPersonalExpenditure

AnnualIncome

$10

$20

$30

$40

$10,000

$20,000

$30,000

$40,000

Ceteris paribus

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40

30

20

10

10 20 30 40

A B C D

Y=0

X=10

X

Y


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There is an IndependentRelationship betweentwo variables (No relation)

That is when one variable

changes, the other variableremains unchanged

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What is theSlope of a line?

The ratio of change in thevariable on the vertical axis(the rise or fall) to changein the variable on thehorizontal axis (the run).


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Slope = rise/run =

vertical axis/horizontal axis= Y/X

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Slope of a Curve

The slope is the change of rise over the

change in run.

The slope of a curve at any point is

equal to the slope of the straight line

drawn tangent to the curve at that

point..


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2

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10 20 30 40

AY=2

X=30 X

YPositive slope of an

upward-sloping curve

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10

5

25 50 75 100

AY=

X=50

-10

X

Y Negative slope of andownward-sloping curve


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Can Slope varyalong a curve?

Yes, the slope of a curvecan vary along the curve,

as the tangent lines differat different points of thecurve.

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What can change

other than price?When income increases, forexample, the whole demandcurve shifts upward


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15

10

5

25 50 75 100

Annual Income$60,000


X

Y

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A decrease in the price per CD causes a

movement downward along each curve. However, any change in the ceteris paribus,

represented by the change in income willcause a shift in the curve itself.

In this case, As the annual income rises,there is a shift rightward in the position ofthe demand curve


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25 50 75 100



X

Y

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The difference between amovement along a curveand a shift in the curve?

When price changes, thereis movement along acurve. When somethingother than price changes,

the whole curve shifts.


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A shift in a curve occursonly when the ceteris paribusassumption is relaxed and athird variable not on either axisof the graph is allowed tochange

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Appendix Quiz

1999 South-Western College Publishing


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5 10 15 20

D

EXHIBIT A-7

X

Y

C

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1. Straight line CD in Exhibit A-7 shows that

a. increasing the value of X will increase thevalue of Y.

b. decreasing the value of X will decreasethe value of Y.

c. there is a direct relationship between Xand Y.

d. all of the above.

1999 South-Western College Publishing

D. As the value of X increases, the valueof Y increases, and vice versa; this iscalled a direct relationship.


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2. In Exhibit A-7, the slope of straight lineCD is

a. 3.

b. 1.

c. -1.

d. 1/2.

D. The slope of a line is measured by the

rise over the run, or a change in verticaldivided by a change in the horizontal.For example, as Y increases from 5 unitsto 15, X increases from 0 to 20. Theslope is 10 divided by 20.

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3. In Exhibit A-7, the slope of straight lineCD is

a. positive.

b. zero.c. negative.

d. variable.

A. When both X and Y move in the samedirection, it is said that they aredirectly related to one another.


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20

15

10

5

5 10 15 20

A

B

EXHIBIT A-8

X

Y

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4. Straight line AB in Exhibit A-8 shows that

a. increasing the value of X reduces thevalue of Y.

b. decreasing the value of X increases thevalue of Y.

c. there is an inverse relationship betweenX and Y.

d. all of the above.

D. When the value of X decreases, thevalue of Y increases and vice versa;this shows a direct relationshipbetween X and Y.


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5. As shown in Exhibit A-8, the slope ofstraight line AB

a. decreases with increases in X.

b. increases with increases in X.

c. increases with decreases in X.

d. remains constant with changes in X.

D. The slope of a straight line stays thesame between the two points on the line.

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6. In Exhibit A-8, the slope of straightline AB is

a. 3.

b. 1.

c. -1.d. -5.

C. There is a one to one inverse ratiobetween a change in X and a change inY. For example, as Y decreases from20 units to 0, X increases from 0 to 20.The slope is -20 divided by 20.


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7. A shift is a curve represents a change ina. the variable on the horizontal axis.

b. the variable on the vertical axis.

c. a third variable that is not on eitheraxis.

d. any variable that is relevant to therelationship being graphed.

C. A shift occurs when somethingchanges other than the price.

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8. A change in a third variable not oneither axis of a graph is illustratedwith a

a. horizontal or vertical line.

b. movement along a curve.c. shift of a curve.

d. point of intersection.

C. When price changes the movement isalways along a stationary curve. Whensomething changes other than price,the whole curve shifts.


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