| KEY TERMS |

Opportunity cost 4 Theory 9 Economic model 10

Abstraction 8 Correlation 10

| DISCUSSION QUESTIONS |

1. Think about how you would construct a model of how 2. Relate the process of abstraction to the way you take

your college is governed. Which officers and administra- notes in a lecture. Why do you not try to transcribe every

tors would you include and exclude from your model if word uttered by the lecturer? Why don™t you write down

the objective were one of the following: just the title of the lecture and stop there? How do you de-

cide, roughly speaking, on the correct amount of detail?

a. To explain how decisions on financial aid are made

3. Explain why a government policy maker cannot afford

b. To explain the quality of the faculty

to ignore economic theory.

Relate this to the map example in the chapter.

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Licensed to:

Chapter 1 13

What Is Economics?

| APPENDIX | Using Graphs: A Review1

A variable is something measured by a number; it is

As noted in the chapter, economists often explain and

used to analyze what happens to other things when the

analyze models with the help of graphs. Indeed, this

size of that number changes (varies).

book is full of them. But that is not the only reason for

studying how graphs work. Most college students will For example, in studying how markets operate, we

deal with graphs in the future, perhaps frequently. You will want to keep one eye on the price of a commodity

will see them in newspapers. If you become a doctor, you and the other on the quantity of that commodity that is

will use graphs to keep track of your patients™ progress. bought and sold.

If you join a business firm, you will use them to check For this reason, economists frequently find it useful

profit or performance at a glance. This appendix intro- to display real or imaginary figures in a two-variable

duces some of the techniques of graphic analysis”tools diagram, which simultaneously represents the behav-

you will use throughout the book and, more important, ior of two economic variables. The numerical value of

very likely throughout your working career. one variable is measured along the horizontal line at

the bottom of the graph (called the horizontal axis),

GRAPHS USED IN ECONOMIC ANALYSIS starting from the origin (the point labeled “0”), and

the numerical value of the other variable is measured

up the vertical line on the left side of the graph (called

Economic graphs are invaluable because they can dis-

the vertical axis), also starting from the origin.

play a large quantity of data quickly and because they

facilitate data interpretation and analysis. They enable The “0” point in the lower-left corner of a graph where

the eye to take in at a glance important statistical rela- the axes meet is called the origin. Both variables are

tionships that would be far less apparent from written equal to zero at the origin.

descriptions or long lists of numbers.

Figures 1(a) and 1(b) are typical graphs of economic

analysis. They depict an imaginary demand curve, rep-

TWO-VARIABLE DIAGRAMS resented by the brick-colored dots in Figure 1(a) and

the heavy brick-colored line in Figure 1(b). The graphs

Much of the economic analysis found in this and other show the price of natural gas on their vertical axes and

books requires that we keep track of two variables si- the quantity of gas people want to buy at each price on

multaneously. the horizontal axes. The dots in Figure 1(a) are

F I GU R E 1

A Hypothetical Demand Curve for Natural Gas in St. Louis

D

6

6

5

5

4

4

Price

Price

a P a

P

3 3

b

b

2

2

D

1

1

Q Q

0 20 40 60 80 100 120 140 0 20 40 60 80 100 120 140

Quantity Quantity

(a) (b)

NOTE: Price is in dollars per thousand cubic feet; quantity is in billions of cubic feet per year.

Students who have some acquaintance with geometry and feel

1

quite comfortable with graphs can safely skip this appendix.

Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.

Licensed to:

Part 1

14 Getting Acquainted with Economics

“whole story,” any more than a map™s latitude and lon-

connected by the continuous brick-colored curve

gitude figures for a particular city can make someone an

labeled DD in Figure 1(b).

authority on that city.

Economic diagrams are generally read just as one

would read latitudes and longitudes on a map. On the

demand curve in Figure 1, the point marked a repre-

THE DEFINITION AND MEASUREMENT

sents a hypothetical combination of price and quan-

OF SLOPE

tity of natural gas demanded by customers in St.

Louis. By drawing a horizontal line leftward from

that point to the vertical axis, we learn that at this One of the most important features of economic dia-

point the average price for gas in St. Louis is $3 per grams is the rate at which the line or curve being

thousand cubic feet. By dropping a line straight down sketched runs uphill or downhill as we move to the

to the horizontal axis, we find that consumers want 80 right. The demand curve in Figure 1 clearly slopes

billion cubic feet per year at this price, just as the sta- downhill (the price falls) as we follow it to the right (that

tistics in Table 1 show. The other points on the graph is, as consumers demand more gas). In such instances,

give similar information. For example, point b indi- we say that the curve has a negative slope, or is negatively

cates that if natural gas in St. Louis were to cost only sloped, because one variable falls as the other one rises.

$2 per thousand cubic feet, quantity demanded

The slope of a straight line is the ratio of the vertical

would be higher”it would reach 120 billion cubic

change to the corresponding horizontal change as we

feet per year.

move to the right along the line between two points on

that line, or, as it is often said, the ratio of the “rise” over

TA BL E 1

the “run.”

Quantities of Natural Gas Demanded at Various Prices

The four panels of Figure 2 show all possible types

Price (per thousand

of slope for a straight-line relationship between two

cubic feet) $2 $3 $4 $5 $6

Quantity demanded (billions unnamed variables called Y (measured along the

of cubic feet per year) 120 80 56 38 20 vertical axis) and X (measured along the horizontal

axis). Figure 2(a) shows a negative slope, much like our

Notice that information about price and quantity is demand curve in the previous graph. Figure 2(b)

all we can learn from the diagram. The demand curve shows a positive slope, because variable Y rises (we go

will not tell us what kinds of people live in St. Louis, uphill) as variable X rises (as we move to the right).

the sizes of their homes, or the condition of their fur- Figure 2(c) shows a zero slope, where the value of Y is

naces. It tells us about the quantity demanded at each the same irrespective of the value of X. Figure 2(d)

possible price”no more, no less. shows an infinite slope, meaning that the value of X is

the same irrespective of the value of Y.

A diagram abstracts from many details, some of which

Slope is a numerical concept, not just a qualitative

may be quite interesting, so as to focus on the two

one. The two panels of Figure 3 show two positively

variables of primary interest”in this case, the price of

sloped straight lines with different slopes. The line

natural gas and the amount of gas that is demanded at

in Figure 3(b) is clearly steeper. But by how much?

each price. All of the diagrams used in this book share

The labels should help you compute the answer. In

this basic feature. They cannot tell the reader the

F I GU R E 2

Different Types of Slope of a Straight-Line Graph

Y Y Y Y

Negative Positive Zero Infinite

slope slope slope slope

X X X X

0 0 0 0

(a) (b) (c) (d)

Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.

Licensed to:

Chapter 1 15

What Is Economics?

F I GU R E 3

How to Measure Slope

Y Y

3

Slope = ”

10

C

11

C

1

9 Slope = ”

10 8 B

8 B

A A

X X

0 3 13 0 3 13

(a) (b)

Figure 3(a) a horizontal movement, AB, of 10 units has a negative slope everywhere, and the curve in

(13 2 3) corresponds to a vertical movement, BC, of Figure 4(b) has a positive slope everywhere. But

1 unit (9 2 8). So the slope is BC/AB 5 1/10. In Fig- these are not the only possibilities. In Figure 4(c) we

ure 3(b), the same horizontal movement of 10 units encounter a curve that has a positive slope at first

corresponds to a vertical movement of 3 units (11 2 8). but a negative slope later on. Figure 4(d) shows the

So the slope is 3/10, which is larger”the rise divided opposite case: a negative slope followed by a posi-

by the run is greater in Figure 3(b). tive slope.

By definition, the slope of any particular straight We can measure the slope of a smooth curved line

numerically at any particular point by drawing a

line remains the same, no matter where on that line we

straight line that touches, but does not cut, the curve at

choose to measure it. That is why we can pick any hor-

izontal distance, AB, and the corresponding slope tri- the point in question. Such a line is called a tangent to

angle, ABC, to measure slope. But this is not true for the curve.

curved lines.

The slope of a curved line at a particular point is de-

fined as the slope of the straight line that is tangent to

Curved lines also have slopes, but the numerical value

the curve at that point.

of the slope differs at every point along the curve as we

move from left to right.

Figure 5 shows tangents to the brick-colored curve

at two points. Line tt is tangent at point T, and line rr

The four panels of Figure 4 provide some exam-

ples of slopes of curved lines. The curve in Figure 4(a) is tangent at point R. We can measure the slope of the

F I GU R E 4