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CHAPTER ONE • THE NATURE AND METHOD OF ECONOMICS

direct relationship The

(positive) relationship between two variables that change in the same direction, for example, product price and quantity supplied.

inverse relationship

The (negative) relationship between two variables that change in opposite directions, for example, product price and quantity demanded.

independent variable The variable causing a change in some other (dependent) variable.

dependent variable A variable that changes as a consequence of a change in some other (independent) variable; the "effect" or outcome.

(FIGURE A1-1

Because the graph has two dimensions, each point within it represents an income value and its associated consumption value. To find a point that represents one of the five income-consumption combinations in Table A1-1, we draw perpendiculars from the appropriate values on the vertical and horizontal axes. For example, to plot point c (the $200 income-$150 consumption point), perpendiculars are drawn up from the horizontal (income) axis at $200 and across from the vertical (consumption) axis at $150. These perpendiculars intersect at point c, which represents this particular income-consumption combination. You should verify that the other income-consumption combinations shown in Table A1-1 are properly located in Figure A1-1. Finally, by assuming that the same general relationship between income and consumption prevails for all other incomes, we draw a line or smooth curve to connect these points. That line or curve represents the income-consumption relationship.

If the graph is a straight line, as in Figure A1-1, we say the relationship is linear.

Direct and Inverse Relationships

The line in Figure A1-1 slopes upward to the right, so it depicts a direct relationship between income and consumption. By a direct relationship (or positive relationship) we mean that two variables—in this case, consumption and income—change in the same direction. An increase in consumption is associated with an increase in income; a decrease in consumption accompanies a decrease in income. When two sets of data are positively or directly related, they always graph as an upsloping line, as in Figure A1-1.

In contrast, two sets of data may be inversely related. Consider Table A1-2, which shows the relationship between the price of basketball tickets and game attendance at Informed University (IU). Here we have an inverse relationship (or negative relationship) because the two variables change in opposite directions. When ticket prices decrease, attendance increases. When ticket prices increase, attendance decreases.

The six data points in Table A1-2 are plotted in Figure A1-2. Observe that an inverse relationship always graphs as a downslo ing line.

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