Principles of Micro by Tanya Molodtsova Fall 2005

Principles of Micro by Tanya Molodtsova, Fall 2005 Lecture 3: Graphing: A Brief Review

1. Graphs of a Single Variable n Pie Chart n Bar Graph n 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

Bar Graph: Distribution of Grades

Time Series Graph: Number of Students Who Got an A

2. Graphs of Two Variables: The Coordinate System n 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. n

2. Graphs of Two Variables: The Coordinate System n The point with both an x-coordinate and y-coordinate of zero is called the origin. n Two variables that increase or decrease together have a positive correlation. n Two variables that move in opposite directions (one increases when the other decreases) have a negative correlation.

3. Curves in the Coordinate System Show 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. n n When a variable that is not named on either axis changes, the curve shifts.

4. Slope n 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.

4. Slope l 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”). l 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 n n 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 n 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.