Graphs and Equations in Economics

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Graphs and Equations in Economics
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Two uses of graphs and equations
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• To describe and analyze theories and models
• To describe and analyze empirical evidence

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1. Using Graphs and Equations to Describe and
Analyze Theories and Models
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Graphs and equations can be used to express
relationships
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• Qd 50 -2(Price) 3(Income)
• Says that the quantity that people are willing
  and able to purchase decreases s the price
  increases and increases as income increases
• Qd is negatively related to the price and
  positively related to income

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We can create a demand schedule by
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• Picking a level of income and holding it
  constant, for example 1,000
• And then varying the price
• The schedule will state the amount people would
  by at any price if their income was 1,000
• If income goes up we get a new schedule

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Qd50-2(Price) 3(Income)
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When we graph the demand schedule
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• We obtain a demand curve
• If we then graph the demand schedule for the
  higher income we obtain a demand curve that is
  further to the right
• In economics this is called shifting the curve

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Demand Curve Shift
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• Often we draw curves without stating the specific
  function
• You should still think about what the curve is
  saying

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What does this Average Total Cost curve say?
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2. Using graphs and equations to analyze and
describe actual data
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Federal Spending in 2002
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Price of Vanity Plates and Sales
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Life Expectancy and Per Capita GDP
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• Often we want to be able to state the
  relationship more specifically
• Econometric techniques allow us to find the curve
  and the equation that best fit the data

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This is the line that best fits the data
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This is the curve and the equation that describes
it
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You have to be cautious in doping such analysis
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• Correlation is not causation