Most graphs in economics are based on a grid bordered on the left and below by two perpendicular lines that show the values of two variables: x and y. One variable is called the x-variable and the other is called the y-variable. The solid horizontal line at the bottom of the graph is called the horizontal axis or x-axis, and values of the x-variable are measured along it. Similarly, the solid vertical line on the left of the graph is called the vertical axis or y-axis, and values of the y-variable are measured along it. The point where the two axes meet, each variable is equal to zero. This is known as the origin. As you move rightward from the origin along the x-axis, values of the x-variable are positive and increasing. As you move up from the origin along the y-axis, values of the y-variable are
positive and increasing.
The table below shows the data on the outside temperature and the number of ice cream cones that a typical vendor can expect to sell at a football stadium during one game.
X-Variable :
Temperature Outside
Y-Variable:
Number of Ice Cream Cones Sold
Point
40
0
A
60
10
B
70
30
C
80
50
D
90
70
E
The first column shows the values of outside temperature (the x-variable) and the second column shows the number of ice cream cones sold (the y-variable). Five combinations or pairs of the two variables are shown, each denoted by A through E in the third column.
You can plot each of the five points A through E on the graph by using a pair of numbers: the values that the x-variable and the y-variable take on for a given point.
For example, at point A, the x-variable takes on the value of 40 and the y-variable takes on the value of 0.
On the axis below, plot point A (40, 0) and accordingly point B (60, 10), point C (70, 30), point D (80, 50), point E (90,70). As you will see, if one of the variables for a point has a value of zero, it will lie on one of the axes. If the value of x is zero, the point will lie on the vertical axis (this is known as the vertical intercept); if the value of y is zero, the point will lie on the horizontal axis, like point A (known as the horizontal intercept).
Most graphs depict a relationship between two variables and represent a causal relationship, a relationship in which the value of one variable is determined or influenced by the value of another variable. In a causal relationship, the determining variable is called the independent variable, while the variable it determined is called the dependent variable.
In our example the number of ice cream cones sold is determined or influenced by the temperature outside; therefore, temperature is the independent variable and is measured along the horizontal axis or x-axis, while number of ice cream cones sold is the dependent variable and is measured along the vertical axis or y-axis.
By convention, x represents an independent variable and lies on the horizontal axis, while y represents a dependent variable and lies on the vertical axis.
When you connect points A, B, C, D, and E on the graph, such a line on a graph is called a curve, regardless of whether it is a straight line or a curved one. If the curve that shows relationship is a straight line, or linear, the variables have linear relationship. If the curve is not a straight line, or is nonlinear, the variables have a nonlinear relationship.
The shape and the direction of the curve reveal the general nature of the relationship. When an increase in one variable is associated with an increase in the other variable, the two variables are said to have a positive relationship. When an increase in one variable is associated with a decrease in the other variable, the two variables are said to have a negative relationship. If two variables are independent of each other, then there is no relationship between two variables.
The diagram above represents a positive relationship.