Muhammad Kemal Ardiansyah 16/395626/EK/20897

Graphing : A Brief Review (Summary)

Graphs serve two purposes in developing economic theories. First, graphs offer a
way to visually express ideas that might be less clear if described with equations
or words. Second, when analyzing economic data, graphs provide a powerful way
to finding and interpreting patterns. Economists use graphs to study the
mathematical relationships among variables.

Graphs of a Single Variable

There are three common graphs:

a. Pie Chart

Canada's Composition of Revenues for 2013-14

Personal income tax Corporate income tax EI Premium revenues

2% 6%
11%
GST Other revenues Non-resident income tax
11% 48%

8%
Other taxes and duties (excluding GST) 14%

b. Bar Graph
 Compares the 2013 average income in five countries in US$ (World Bank)
60,000.00
50,000.00
40,000.00
30,000.00
20,000.00
10,000.00
0.00

c. Time-Series Graph

Population in Germany from 1960-2010 (World Bank)

84
82
80
78

Population (million) 76
74
72
70
68
1960 1970 1980 1990 2000 2010

Years

Graphs of Two Variables: The Coordinate System

If you need to display two variables on a single chart, the coordinate system
suits your task. Example, we want to examine the relationship between
organizational activity (hours per week) and GPA. Amir, for instance, is
represented by the ordered pair (35 hours/2.5 GPA), while his smart-introvert
friend Ana is represented by the ordered pair (10 hours/3.75 GPA). This type of
graph (the below picture) is called a scatterplot.
 4 3.75

3.5

2.5 2.5

2
Grade Point Average (GPA)
1.5

0.5

0
0 5 10 15 20 25 30 35 40

Organizational Activity (hours per week)

Because organizational activity and GPA typically move in opposite directions,

they have a negative correlation. If these variables move in the same directions,
they have a positive correlation.

Curves in the Coordinate System

To see at how one variable affects another, holding everything else constant,
lets consider one of the most important graphs, the demand curve. The demand
curve traces out the effect of a goods price on the quantity of the good
consumers want to buy. Please see the below table.

Price of shirt Student Student allowance per Student allowance

($) allowance per month $650 per month $750
month $550
30 2 shirts 5 shirts 8 shirts
25 6 9 12
20 10 13 16
15 14 17 20
10 18 21 24
Demand curve, D3 Demand curve, D1 Demand curve, D2

This table show the number of shirts student buys at various incomes and prices.
Suppose that students allowance is $650 per month. When the points that
represent these entries from the table (Demand curve, D 1) are connected, they
form a line (picture below). The line D1 shows how students purchases of shirts
depend on the price of shirts when his allowance is held constant. Because the
price and the quantity (D1) demanded are negatively related, the demand curve
slopes downward. If these variables make a demand curve slopes upward, we
say these variables are positively related.

35

30 30

25 25

20 20

Price of Shirts
15 15

10
10
5

0
4 6 8 10 12 14 16 18 20 22

Quantity of Shirts

Now, suppose that students allowance rises to $750 per month. At any given
price, he will buy more shirts than before. We now draw a new demand curve
(curve D2) using the entries from the right column of table. This new curve is
pictured alongside the old one (curve D 1), farther to the right. Therefore,
students demand curve for shirts shifts to the right when his allowance
increases. If his allowance falls to $550 per month, he would buy fewer shirts at
any given price and her demand curve shifts to the left.
 35

30

25

20 20 20 20

Price of Shirts
15

10 10 10
10

0
0 5 10 15 20 25 30

Quantity of Shirts

Slope
To answer questions about how much one variable responds to changes in
another variable, we can use the concept of slope. The slope of a line is the ratio
of the vertical distance covered to the horizontal distance covered as we move
along the line. It is usually written out in mathematical symbols as follows:

y
Slope = x
 35

30 30

25 25

20 20
Price of Shirts
15 15

10
10
5

0
4 6 8 10 12 14 16 18 20 22

Quantity of Shirts

y 2025 5
Slope = x = 139 = 4

The slope tells us about how responsive his purchases are to changes the price.
A small slope (close to zero) means that students demand curve is relatively flat.
A larger slope means that students demand curve is relatively steep.

Cause and Effect

Economists use graphs to argue about how one set of events cause another set
of events, just like our graph, the demand curve. But, when graphing data from
the real world, there are some problems. The first problem, it is difficult to hold
two variables constant. The changes in our graph might actually being caused by
an omitted variable that not pictured on the graph. Even we have found the
correct two variables to look at, we might face the second problem, reverse
causality.
Omitted Variables We can use an example to make it easier to understand.
People who have a cigarette lighters are associated with the risk of cancer.
Please see the below figure.
 Risk of Cancer

1
Number of Lighters in House

People who own more cigarette lighters are more likely to smoke cigarettes,
which leads them to cancer. The problem is, this graph does not tell us about the
number of cigarettes smoked. Cancer is caused by cigarettes, not cigarette
lighter. So, it is important to ask whether the movements of an omitted variable
could explain the results we see.
Reverse Causality

Health Quality

1
Higher Incomes

This is kind of a loop, unique phenomenon. We change our behavior in response

to a change in our future conditions. Example, people who have higher incomes
are associated with better health. Maybe because they have a high budget, they
can live a high standard living life. Or maybe, they already have a better health,
so they can do their activity in an efficient and effective way and in the end, they
become an upper-class people. Which variable cause which variable?
Just keeping in mind that vehicles dont absolutely cause traffic jams (omitted
variables) and the relationship between higher incomes and better health might
be a loop, will keep us to comprehensively understand about the economic
situations.