Principles of Economics
Principles of Economics

Principles of Economics

Lead Author(s): Stephen Buckles

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Top Hat

Stephen Buckles, Principles of Economics, Only One Edition needed

Cengage

N. Gregory Mankiw, Principles of Economics, 8th Edition

Pearson

Case, Fair, Oster, Principles of Economics, 12th Edition

McGraw-Hill

McConnell, Brue, Flynn, Principles of Microeconomics, 7th Edition

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Up to 40-60% more affordable

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$130

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Hardcover print text only

$140

Hardcover print text only

Always up-to-date content, constantly revised by community of professors

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Includes embedded multi-media files and integrated software to enhance visual presentation of concepts directly in textbook

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Only available with supplementary resources at additional cost

Only available with supplementary resources at additional cost

Customizable

Ability to revise, adjust and adapt content to meet needs of course and instructor

All-in-one Platform

Access to additional questions, test banks, and slides available within one platform

Pricing

Average price of textbook across most common format

Top Hat

Stephen Buckles, Principles of Economics, Only One Edition needed

Up to 40-60% more affordable

Lifetime access on any device

Cengage

N. Gregory Mankiw, Principles of Economics, 8th Edition

$130

Hardcover print text only

Pearson

Case, Fair, Oster, Principles of Economics, 12th Edition

$175

Hardcover print text only

McGraw-Hill

McConnell, Brue, Flynn, Principles of Microeconomics, 7th Edition

$140

Hardcover print text only

Always up-to-date content, constantly revised by community of professors

Constantly revised and updated by a community of professors with the latest content

Top Hat

Stephen Buckles, Principles of Economics, Only One Edition needed

Cengage

N. Gregory Mankiw, Principles of Economics, 8th Edition

Pearson

Case, Fair, Oster, Principles of Economics, 12th Edition

McGraw-Hill

McConnell, Brue, Flynn, Principles of Microeconomics, 7th Edition

In-book Interactivity

Includes embedded multi-media files and integrated software to enhance visual presentation of concepts directly in textbook

Top Hat

Stephen Buckles, Principles of Economics, Only One Edition needed

Cengage

N. Gregory Mankiw, Principles of Economics, 8th Edition

Pearson

Case, Fair, Oster, Principles of Economics, 12th Edition

McGraw-Hill

McConnell, Brue, Flynn, Principles of Microeconomics, 7th Edition

Customizable

Ability to revise, adjust and adapt content to meet needs of course and instructor

Top Hat

Stephen Buckles, Principles of Economics, Only One Edition needed

Cengage

N. Gregory Mankiw, Principles of Economics, 8th Edition

Pearson

Case, Fair, Oster, Principles of Economics, 12th Edition

McGraw-Hill

McConnell, Brue, Flynn, Principles of Microeconomics, 7th Edition

All-in-one Platform

Access to additional questions, test banks, and slides available within one platform

Top Hat

Stephen Buckles, Principles of Economics, Only One Edition needed

Cengage

N. Gregory Mankiw, Principles of Economics, 8th Edition

Pearson

Case, Fair, Oster, Principles of Economics, 12th Edition

McGraw-Hill

McConnell, Brue, Flynn, Principles of Microeconomics, 7th Edition

About this textbook

Lead Authors

Stephen Buckles, Ph.DVanderbilt University

Stephen Buckles is a Senior Lecturer at Vanderbilt University, where he also received his Ph.D. in Economics. Buckles has been the recipient of numerous awards, including Madison Sarratt Prize for Excellence in Undergraduate Teaching (Vanderbilt, 2008), Kenneth G. Elzinga Distinguished Teaching Award (Southern Economic Association, 2006), and the Dean’s Award for Excellence in Teaching (Vanderbilt, 2007). His course pack, which this text is based on, has been used by thousands of students and engages the concepts of active learning.

PJ Glandon, PhDKenyon College

PJ Glandon joined Kenyon College as an Associate Professor of Economics after completing his Ph.D. at Vanderbilt University.

Contributing Authors

Benjamin ComptonUniversity of Tennessee

Caleb StroupDavidson College

Chris CotterOberlin College

Cynthia BenelliUniversity of California

Daniel ZuchengoDenver University

Dave BrownPennsylvania State University

John SwintonGeorgia College

Michael MathesProvidence College

Li FengTexas State University

Mariane WanamakerUniversity of Tennessee

Rita MadarassySanta Clara University

Ralph SonenshineAmerican University

Zara LiaqatUniversity of Waterloo

Susan CarterUnited States Military Academy

Julie HeathUniversity of Cincinatti

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Chapter 2 Appendix: Introduction to Graphs

The study of economics makes extensive use of graphs. You have already seen some, and you are going to see a lot more. Graphs are very handy tools, and not just in economics. They can organize large amounts of information into a simple picture. They can visually represent cause and effect. They make readily understandable what could otherwise take pages of explanation and much data. In short, they can make your life much easier - if you know how to use and read them. Otherwise, they can end up confusing you and making economics more difficult, instead of easier. This is something we would like to avoid, so here is a brief introduction to graphs.

Appendix 2.1 Graphs as Maps

Appendix 2.1.1 Single Points

Suppose we are on a flat surface and want to tell someone where we are. We could pick some point of reference, a position everyone knows, and then tell our friend how far left or right we are of that point and how far above or below that point we are. On a graph the point of reference is called the origin. We measure how far to the right we are of the origin by the horizontal axis (or x-axis), and we measure how far above the origin we are by the vertical axis (or y-axis). The origin is where the horizontal and vertical axes cross. In Figure A2.1, the vertical axis is labeled “Distance (in feet) above the origin.” The horizontal axis is labeled “Distance (in feet) to the right of the origin.”

For example, say we are at the position labeled A on the graph below Figure A2.1. “A” is an example of a point, a specific spot on the graph that we can identify by using only two numbers: how far along the horizontal axis it is from the origin and how far along the vertical axis it is from the origin. Point A is 5 feet to the right of the origin and 7 feet above it.

Figure A2.1: A single point on a two-dimensional graph.​

Appendix 2.1.2 Multiple Points

A graph can also show how two points sit relative to each other. If someone else is at point B, then we can tell where they are relative both to us and to the origin (Figure A2.2). B is eight feet to the right of the origin and 3 feet above it. It is also 3 feet right of A and 4 feet below it.

Figure A2.2: Two points on a two-dimensional graph.​

Appendix 2.1.3 Graphs as Relationships

While graphs may be good at showing where points are relative to each other and to the origin, what they are really good at is showing the relationship between two quantities. We call the two quantities we are examining variables, because we want to see want happens when we change, or vary, them.

Suppose, for example, that we want to look at the market for oranges. The two quantities we want to look at, the two variables, are the price of oranges and the number of oranges that people are willing and able to buy at that price. We want to see how the quantity of oranges people want to buy varies with the price of oranges. To show this in a graph, we will put the price of oranges on the vertical axis and the quantity individuals want to buy on the horizontal axis. When oranges are $7.00 apiece, nobody wants to buy any (point A on Figure A2.3). If we lower the price to $5.00 per orange, then individuals may buy 30 oranges each week (point B). At $3.00 per orange, 60 oranges are bought in a week. At $1.00, 90 are bought in a week.

Figure A2.3: A series of observations on a graph.​

Graphing Question 2.01A

Appendix 2.1.4 Filling in the Blanks

We can use this information about specific price/quantity combinations to construct a demand curve for oranges, which will describe the quantity of oranges demanded at every price. We do this by drawing a line connecting all four points (shown in Figure A2.4). This gives us a picture of how the amount demanded changes as price changes.

Figure A2.4: Connecting the observations - the demand for oranges.​

If the line accurately represents all of the combinations of prices and quantities demanded, we can make inferences about what happens to the quantity of oranges people will buy at prices other than $7, $5, $3, and $1. We can tell that at a price of $4.00 per orange, 45 oranges per week will be bought. We can tell this by starting at the $4 mark on the vertical axis and following this straight across until we intersect the demand curve. Then we go straight down to see the quantity this represents (shown in Figure A2.5). People will buy 45 oranges per week.

Figure A2.5: The meaning point of the line​

The demand curve that we have come up with in our oranges market is a straight line. This is not always, or even most often, the case, but it’s an assumption that makes our discussion of graphs easier. Later on, we’ll encounter more accurate models of demand, but for now, a straight line is good enough.

Graphing Question 2.02A

Appendix Question 2.01

Appendix Question 2.01

Jerry and Ralph are consumers of hockey tickets. For this exercise, suppose that all seats in the arena are of the same quality and have the same price. When tickets cost $160, neither will buy a ticket. If tickets cost $140, Jerry is willing to buy one, but Ralph will still not buy any. When each ticket costs $120, Jerry will buy two tickets during the course of the hockey season and Ralph will still buy no tickets. At a price of $100 per ticket, Jerry is willing to buy three and Ralph is willing to buy two tickets in a season. At a price of $60, Jerry will buy five tickets and Ralph will buy six tickets a season. At $40 a ticket, Jerry will buy six and Ralph will buy eight tickets during the season. Describe Jerry’s demand curve and Ralph’s demand curve. Then, suppose that Jerry and Ralph are the only individuals in the market and describe the market demand curve that shows the total number of tickets the market will buy at each price. Explain how you derive the market demand curve.

Hover here to see the hint for Appendix Question 2.01.
Click here to see the answer to Appendix Question 2.01.


Appendix 2.1.5 Slopes

An important concept in understanding graphs is the concept of slope. The slope of a line shows how much one variable changes as the other variable changes. It is the amount of change in the variable measured along the vertical axis (y-axis) divided by the amount of change in the variable measured along the horizontal axis (x-axis).

In this equation, Δy represents the change in the variable measured along the vertical axis and Δx represents the change in the variable measured along the horizontal axis.

Appendix Question 2.02

When a restaurant prices pizza at $10 per slice they sell 100 slices in a night. If they sell pizza for $5 per slice, they sell 300 slices in a night. What is the slope of this demand curve for pizza?

A

1/40

B

40

C

-1/40

D

-40

Graphing Question 2.03A


Appendix Question 2.03

A study finds that at a price of $10, 100 t-shirts are sold. At a price of $5, 300 t-shirts are sold. How many t-shirts can you assume are sold at $7? Why?

A

220

B

200

C

180

D

160

Appendix 2.1.6 A Negative Slope

Let’s go back to demand curves. Car dealerships are looking at the demand they face for used Toyota Priuses. They decide to look at how many they sell at each price. In this market, suppose that at a price of $18,000 the dealerships sell 100 in a year. At $15,000 they sell seven hundred cars a year. The slope of the demand curve (demand curve A in Figure A2.6) is the change in the price divided by the change in the quantity sold, or - $3,000 divided by 600 cars. Its slope is a minus 5. The slope is negative, which tells us that as one variable decreases, the other increases. As the price of a used Toyota Prius falls, the number of cars that people are willing and able to buy rises. The slope of demand curve A is also relatively flat, which as the graph shows us means that the number of used Priuses people want to buy is quite responsive to a change in their price. A change in price of $3,000 results in a change in sales of six hundred cars per year.

Let’s look at a different demand curve faced by dealerships in a neighboring state. If these dealerships could sell 800 Priuses a year at a price of $18,000 but could sell nine hundred a year at a price of $15,000, the slope will be -$3,000 divided by 100 cars. This is minus 30. Demand curve B (Figure A2.6) shows a market where desire for used Priuses is not very, or at least a lot less, responsive to changes in price. A $3,000 price reduction now results in an increase of only 100 cars sold. In the first example, a $3,000 price decrease caused an increase of 600 cars sold.

Figure A2.6​: Explanation of different slopes.​
Appendix Question 2.04

What does it mean if the graph of demand for Priuses (Demand Curve A, Figure A2.6) becomes steeper (Demand Curve B)?

A

Priuses are more expensive

B

Priuses are cheaper

C

A change in price has less of an impact on the quantity of Priuses purchased

D

A change in price has more of an impact on the quantity of Priuses purchased

Appendix 2.1.7 A Positive Slope

Of course, slopes may also be positive, which means that as one variable increases, the other also increases. There are numerous examples of relationships like this. Gross domestic product has a positive correlation with several factors, that is, GDP increases, as several influencing factors increase. Gross domestic product (GDP) is the value of all of the final goods and services produced by a nation's economy in a year. Our GDP is influenced by how much labor businesses employ, how productive our workers are, the state of our technology, and the amount of physical capital (such as factories) our nation has.

Figure A2.7 shows a relationship between GDP and employment. This is a relationship that should be intuitive. If a restaurant employs more kitchen help, they can cook and sell more food. If an assembly line hires more workers, they can produce more cars. A construction company can build more skyscrapers if they have more employees. Similarly, the whole economy can produce more, when employment is higher. If we put the data on a graph, A2.7, the slope of the graph will be positive. As employment increases, GDP increases. The calculated slope differs between years. But between 2014 and 2015, the slope of the curve is approximately ($18,000 billion - $17,400 billion) / (141 million - 138 million) or $ 600 billion / 2 million, or a slope of approximately $300,000 per additional worker.

Figure A2.7: The relationship between gross domestic product and employment.​

In Figure A2.7, the vertical axis crosses the horizontal axis at 132 instead of at 0. This is to make the graph easier to see – otherwise, the line showing the relationship between GDP and employed persons would be a tiny line in the upper right-hand corner of the graph. Notice that the vertical axis begins at $16 trillion for the same reason.

Graphing Question 2.04A

Graphing Question 2.05A

Graph A represents a line where, hypothetically, GDP is not influenced by the number of people employed in the economy. The horizontal line is located at a GDP of $17 trillion. If employment is 134 million, GDP is $17 trillion, if employment is 136 million, GDP is $17 trillion. Graph B represents a line where employment is, hypothetically, constant, but GDP varies. A vertical line at an employment level of 138 million means that at every level of GDP, employment is still the same. Notice that according to this graph, if GDP is $16 trillion, employment is 138 million, if GDP if $17 trillion, employment is 138 million.


Appendix Question 2.05

Assume that the relationship between GDP and the employment rate has a positive slope. If an employment rate of 100 million is associated with a GDP level of $20 trillion and an employment rate of 110 million is associated with a GDP level of $21 trillion, what can you assume is the GDP level for an employment rate of 120 million?

A

$19

B

$20

C

$21

D

$22

Appendix Question 2.06

Appendix Question 2.06

Provide an example of two goods that would have a negative slope. Imagine a line showing the production of one of your goods as production of the other good increased. Describe the line.

Hover here to see the hint for Appendix Question 2.06.
Click here to see the answer for Appendix Question 2.06.

Appendix 2.1.8 A Special Case

There is a special case of slope that is important in economics. This is when the slope of a line is 1. The importance of lines with a slope of 1 will become clear in later chapters; for now, we will just explain what it means. When the slope of a line is 1, the line travels upward on the graph at a 45° angle from the origin. This means that when the value on the vertical axis increases, the value on the horizontal axis will increase by an identical number. There is a one-to-one relationship between the two variables. In fact, points along this line are the only points where this is true. An example might be the relationship between right shoes and left shoes. For every right shoe you have, you will have exactly one left shoe. Notice on the graph that as we move up from the point where 6 left shoes and 6 right shoes are produced, for every additional 1 left shoe produced, the line shows that an additional right shoe is produced.

Figure A2.8: Curves with a slope of 1.

Graphing Question 2.06A


Appendix Question 2.07

What is the meaning of point “A” in Figure A2.8? of point “B”?

A

Point A represents 2 right shoes and 6 left shoes, Point B represents 4 right shoes and 8 left shoes.

B

Point A represents 6 right shoes and 2 left shoes, Point B represents 4 right shoes and 8 left shoes

C

Point A represents 2 right shoes and 6 left shoes, Point B represents 8 right shoes and 2 left shoes

D

Point A represents 6 right shoes and 2 left shoes, Point B represents 8 right shoes and 2 left shoes


Appendix Question 2.08

Consider two demand curves, demand curve A has a slope of -3 and demand curve B has a slope of -2. Remember that demand curves are drawn so that price is on the y-axis and quantity of goods is on the x-axis. Which of the following must be true?

A

As price is decreased, quantity demanded increases more for demand curve A than demand curve B

B

Quantity demanded decreases in both cases since both slopes are negative

C

As price is decreased, quantity demanded increases more for demand curve B than demand curve A

D

There is not enough information

Appendix 2.2 In Conclusion

This discussion should prepare you for most of the graphs you will encounter in an introduction to economics. We have only gone over the basics, however. There are variations on the themes we have introduced here that expand and enhance the power of graphs to convey complex information in simple ways. If you understand what we have gone over here, though, it will be much easier for you to pick up these complexities later.

Appendix 2.3 Glossary

Point: A point on a graph relating the quantity of a variable on the y-axis to the quantity of the variable on the x-axis and vice versa.

Demand Curve: A line that describes the quantity of goods that individuals are willing and able to buy at every price level.

Slope: The change in the variable on the vertical axis divided by the change in the variable on the horizontal axis. (Slope = Δy/Δx)

Negative slope: The slope is a negative number. As one variable increases, the other variable decreases. (Any slope where Δy/Δx < 0)

Positive slope: The slope is a positive number. If one variable increases the other variable increases or if one variable decreases the other variable decreases. (Any slope where Δy/Δx ≥ 0)

Answer Key

Answer to Appendix Question 2.01

For the market demand curve, we add the quantities demanded by Jerry and Ralph at each price together. The total becomes the quantity demanded in the market at that price. The market demand curve is not straight. It is kinked at a price of $120 per ticket and a quantity of two tickets per season, which is when Ralph enters the market for tickets. At ticket prices of $120 or above, the market demand curve consists of only Jerry’s demand for tickets. At $100 per ticket and below, the market demand curve includes both Jerry’s and Ralph’s demand for tickets.

Click here to return to Appendix Question 2.01.

Answer to Appendix Question 2.06

There are many possible answers.  The graph should show a line that is higher up the y-axis the closer it gets to the y-axis. As an example, see below. 

Click here to return to Appendix Question 2.06.

If Jerry and Ralph are the only ones in the market, their combined demand is the entire demand for the market.
The change in the variable on the vertical axis divided by the change in the variable on the horizontal axis
One example would be vacation days at the beach and vacation days spent skiing. The use of a vacation day at the beach means there is one less day to go skiing. The graph should look similar to the graph below. (It does not need to be the same, but point A should be to the left of Point B and point A should be located higher on the y-axis than point B.