Principles of Micro
by Tanya Molodtsova, Fall 2005
Lecture 3: Graphing: A Brief Review
1.
Graphs of a Single Variable

Pie Chart

Bar Graph

Time-Series Graph
Distribution of Grades for Midterm #1
Grade
A
% of the
class
10
Number of
students
6
A-
15
9
B+
20
12
B
30
18
B-
20
12
C+ or less
10
6
Pie Chart: Distribution of Grades
A
AB+
B
BC+
Bar Graph: Distribution of Grades
35
30
25
20
Number of Students
15
10
5
0
A
A-
B+
B
B-
C+
Time Series Graph: Number of
Students Who Got an A
12
10
8
6
4
2
0
Midterm 1
Midterm 2
Midterm 3
Final
2. Graphs of Two Variables: The
Coordinate System


Economists often study relationships
between two or more variables.
Ordered pairs of numbers can be graphed
on a two-dimensional grid.
- x-coordinate: the first number in the
ordered pair. It tells us the horizontal
location of the point.
- y-coordinate: the second number in the
ordered pair. It tells us the vertical
location of the point.
2. Graphs of Two Variables: The
Coordinate System

The point with both an x-coordinate
and y-coordinate of zero is called the
origin.

Two variables that increase or decrease
together have a positive correlation.

Two variables that move in opposite
directions (one increases when the
other decreases) have a negative
correlation.
3. Curves in the Coordinate System


Show how one variable affects another,
holding all other variables constant.
Example: demand curve
- shows how the quantity of a good a
consumer wants to purchase varies as its
price varies, holding everything else (such
as income) constant.
- If income changes, the demand curve
shifts, because consumer can buy more of
the good at any price.
When a variable that is not named on either
axis changes, the curve shifts.
4. Slope

How strongly a consumer reacts if
the price of a product changes?
1.
2.
If the demand curve is very steep,
quantity desired does not change
much in response to a change in
price.
If the demand curve is very flat,
quantity desired changes a lot when
the price changes.
y
slope =
x
4. 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 (“rise over run”).

A small slope means that the demand
curve is relatively flat; a large slope
means that the demand curve is relatively
steep.
5. Cause and Effect


Economists are interested in how a change
in Variable A affects a change in Variable
B, holding all other variables constant.
Omitted variables problem
1. If Variables A and B both change at the
same time, we may conclude that the
change in Variable A caused the change
in Variable B.
2. But, if Variable C has also changed, it is
possible that Variable C is responsible
for the change in Variable B.
5. Cause and Effect

Reverse causality
- If Variable A and Variable B both
change at the same time, it is entirely
possible that the change in Variable B
led to the change in Variable A.
- Determining which variable
changed first may not help because
individuals can change their behavior
in response to a change in their
expectations about the future. This
means that Variable A may change
before Variable B because of the
expected change in Variable B.
Practice HW: Chapter 2
1. Economists design economic models
to simplify reality, so economic
models do not include every feature
of the economy.
True or False?
2.1. Firms earn revenue when:
a.
Households purchase factors of
production from firms
b.
Households purchase goods and
services from firms
c.
Firms sell land to households
Practice HW: Chapter 2
2.2 Winona earns $750 per week working
as an accountant for an accounting
firm. Winona's labor is an input that
flows from:
a.
b.
c.
d.
Firms to households through the
markets for goods and services
Households to firms through the
markets for goods and services
Firms to households through the
markets for factors of production
Households to firms through the
markets for factors of production
Practice HW: Chapter 2
2.3 Winona earns $750 per week working
as an accountant for an accounting
firm. The $750 flows from:
a.
b.
c.
d.
Households to firms through the
markets for factors of production
Firms to households through the
markets for factors of production
Households to firms through the
markets for goods and services
Firms to households through the
markets for goods and services
Practice HW: Chapter 2
3.1 The black points (X symbols)
represent production levels of
airplanes and cars. Place an orange
point (square symbol) on each
black point that represents an
efficient level of production.
Practice HW: Chapter 2
Airplanes
D
3,000
C
2,200
A
2,000
Production
possibilities
frontier
1,000
B
0
300
600
700
1,000
Cars
Practice HW: Chapter 2
3.2 The point above the graph
respresents:
a.
b.
c.
Efficient level of production
Inefficient level of production
Impossible level of production
Practice HW: Chapter 2
3.3 The area under the PPF
represents output levels that are:
a.
b.
c.
Efficient
Inefficient
Impossible to produce
Practice HW: Chapter 2
4. An economy produces turkey and yams.
If this economy uses all its resources to
produce turkey, it can produce 60,000
pounds of turkey;
if it uses all its resources to produce yams,
it can produce 90,000 pounds of yams.
Here is the PPF for this economy. True or
False?
Practice HW: Chapter 2
Quantity of Yams
60,000
C
A
Production
possibilities
frontier
0
60,000
Quantity of Turkey
Practice HW: Chapter 2
5. An economy produces turkey and yams.
The graph below shows the PPF for this
economy. Currently, the economy is
producing 4 million pounds of turkey
and 8 million pounds of yams (red
point).
Suppose the economy reallocates some
of its factors of production from
production of yams to production of
turkey. Move the red point to show the
economy's new production point.
Practice HW: Chapter 2
Quantity of Turkey
millions of pounds
E
C
A
8
Production
B possibilities
frontier
D
0
6
Quantity of Turkey
millions of pounds
Practice HW: Chapter 2
The graph below shows the PPF of
an economy that produces food and
computers. The black points
represent possible production
levels.
Practice HW: Chapter 2
Practice HW: Chapter 2
6.1 The economy's initially produces at point
A, where 10 million pounds of food and 7
million computers are produced. Society
then decides it wants to produce 1 million
more computers, so the economy moves
from point A to point B.
At point A, the opportunity cost of 1
million computers is:
a. 1 million pounds of food
b. 2 million pounds of food
c. 3 million pounds of food
d. 5 million pounds of food
Practice HW: Chapter 2
6.2 As the quantity of computers
produced increases, the opportunity
cost of 1 million computers:
a. Increases
b. Decreases
c. Remains constant
Practice HW: Chapter 2
7. The graph below shows the PPF of an
economy that produces food and
computers.
An improvement in technology allows
the economy to produce more computers
for any given quantity of food produced.
Adjust the PPF curve to show the
economy's new production possibilities
after the technological improvement.
Practice HW: Chapter 2
Macro- or Microeconomics
8.1 A firm's decision about what the size
of its new factory
8.2 The effect of a cigarette tax on the
quantity of cigarettes sold
8.3 The effects of the government's tax
policy on long-term economic growth
Practice HW: Chapter 2
9. Which of the following is a positive (rather
than a normative) statement?
a.
The government should increase the
number of welfare programs to lessen the
number of families living in poverty.
b.
The tallest player on a basketball team
should play every minute of the game,
since he can get the most blocks and
rebounds.
c.
On average, people with more years of
education have a higher income.
d.
Every student should take courses in
economics. Students should know the
concepts of opportunity costs and
tradeoffs in order to make good decisions
and understand society.