2. 4 Graphing Economic Theories
Theories are built on assumptions about relationships between variables.
For example, the quantity of eggs demanded is assumed to fall as the
price of eggs rises, and the total amount an individual saves is assumed to
rise as his or her income rises. How can such relations be expressed?Functions
When one variable, X, is related to another variable, Y, in such a way that
to every value of X there is only one possible value of Y, we say that
function of X. When we write this relation down, we are expressing a
functional relation between the two variables, and we write
where f is the function that relates X and Y.Here is a specific but hypothetical example. Consider the relation
between an individual’s annual wage income, which we denote by the
symbol W (for wage income), and the amount that person spends on
goods and services during the year, which we denote by the symbol
consumption). Any particular example of the relation between C and
can be expressed several ways: in words, in a table, in a mathematical
equation, or in a graph.Words
Y =f(X)