Graphical Representation: Income is plotted on the horizontal axis while consumption is plotted on the vertical axis.
Scale Arrangement: The scales on both axes reflect the ranges of values for income and consumption, marked in convenient increments (e.g., $100).
Point Representation: Each intersection point on the graph corresponds to specific income-consumption pairs.
Example: To plot the point representing $200 income and $150 consumption, draw vertical from $200 on the income axis and horizontal from $150 on the consumption axis.
Verify placement of other income-consumption points as shown in the provided table.
Relationship Line: A line or curve is drawn connecting the points, indicating the income-consumption relationship.
A straight line indicates a linear relationship.
Direct Relationship (Positive Relationship): An upward sloping graph indicates that consumption and income move in the same direction.
Increased income leads to increased consumption and vice versa.
Inverse Relationship (Negative Relationship): A downward sloping graph suggests that two variables move in opposite directions.
Example: As basketball ticket prices decrease, attendance increases.
Independent Variable: The cause, which changes first (e.g., income in income-consumption pairs).
Dependent Variable: The effect that changes in response to the independent variable (e.g., consumption).
Distinct Graphing: Economists often place price/cost data on the vertical axis, differing from standard mathematical conventions.
Economists assume other factors affecting consumption or attendance remain constant when analyzing relationships between two variables.
Practical Example: A stock market crash could shift the consumption line due to decreased perceived wealth.
Definition: The slope is the ratio of vertical change (rise/drop) to horizontal change (run) between two points on the line.
Positive Slope Example:
Between two points: Rise = +$50 (increase in consumption), Run = +$100 (increase in income).
Slope = +50 / +100 = 0.5 indicates a $0.50 increase in consumption for every $1 increase in income.
Negative Slope Example:
Between points with a decrease: Rise = -10, Run = +4.
Slope = -10 / +4 = -2.5 indicates a $10 price decrease may increase attendance by 4,000 people.
Slope can vary based on how variables are measured (e.g., attendance measured in thousands vs. individuals).
Adjustments in measurement can lead to different interpretations of slope effects.
Importance: Slope reflects marginal changes important in understanding economic behaviors.
Example: In the income-consumption example, each $1 change instigates a consistent side effect in consumption.
Situations arise where variables are unrelated, illustrated by vertical lines (infinite slope indicates constant behavior regardless of change in the other variable).
Laissez-Faire Capitalism: Minimal government intervention with markets directing economic activity based on individual self-interests.
Command System: Central government control manages all economic activity and ownership (also termed socialism or communism).
Market System: Mixture of government initiative and individual action characterizing most global economies, fostering private ownership and resource allocation through market signals.
Private Property: Individuals and firms own resources, encouraging mutually beneficial transactions and investments.
Freedom of Enterprise and Choice: Economic units have the liberty to make choices regarding production and consumption freely.
Self-Interest: Motivates economic units towards profit maximization, ultimately benefiting society through competition.
Competition: Ensures a balance of economic power, allowing market adjustments through supply and demand.
Markets and Prices: Facilitate coordination of economic activities, enabling consumers and producers to make informed decisions based on market indicators.
Technological Need: Competition drives technological advances and the efficient utilization of capital goods.
Specialization Benefits: Enhances output efficiency by allowing individuals and firms to focus on what they do best, leading to resource optimization.
Production Decisions: Determined by consumer demand and profitability - goods that sell will continue to be produced, while those that do not will be phased out.
Production Techniques: Firms strive for least-cost production to maintain competitiveness.
Resource Distribution: Based on the ability and willingness of consumers to pay price points.
Change Accommodation: Market systems adapt dynamically to shifts in consumer preference, technology, and resource availability.
Progress Promotion: Encourages innovations that lead to higher quality output and living standards through advances in technology and capital.
Adam Smith's Concept: Market systems harmonize self-interest with societal benefits, guiding resources efficiently and effectively without direct interference.
Efficiency, Incentives, and Freedom: Key virtues of market systems promote resource utilization efficiency, encourage innovation and skill, and support personal economic freedom.