# Price and quantity direct relationship examples In other words, the higher the price, the lower the quantity demanded. Why is there a direct relationship between price and supply? In effect, the same \$10 we started with in the above example could carry the same value as \$20 if I am. Direct relationship - equilibrium will increase and so will quantity purchased ( example: Cost of beef goes up, demand for pork goes up). When this price- quantity relationship is plotted on a graph we get a supply curve For example, from Fig. Thus there is a direct price-quantity relationship.

### Quantity Supplied and Price: Functional Relationship

The example we gave of the relationship between height and weight is a direct or positive relationship. In a negative or indirect relationship, the two variables move in opposite directions, that is, as one increases, the other decreases. Consider the price of coffee and the demand for the good. As the price of coffee, for example, goes to higher and higher levels, we can predict that people will substitute tea or hot chocolate for it, and buy less.

As the price of coffee declines, people will buy more and more of it, and quite possibly buy more than they would regularly buy, and store or accumulate it for future consumption, or to sell it to others. This relationship is negative or indirect, that is, as the price variable typically, in economics, the y variable increases, the quantity variable typically, the x variable decreases; and, as the price variable decreases, the quantity demanded increases.

These relationships between positivly- and negatively-related variables are demonstrated in the graphs Figure 1 which follow, positive first and negative second: What is the value of graphs in the study of economics?

Graphs are a very powerful visual representation of the relationship between or among variables. They assist learners in grasping fairly quickly key economic relationships. Years of statistical analysis have gone into the small graph you can examine to learn about key forces and trends in the economy.

Further, they help your instructor to present data in a way which is small-scale or economical, and establish a relationship, frequently historical, between variables in a certain kind of relationship. They permit learners and instructors to establish quickly the peaks and valleys in data, to establish a trend line, and to discuss the impact of historical events such as policies on the data that we wish to analyze.

Types of Graphs in Economics There are various kinds of graphs used in business and economics that illustrate data. These include pie charts segments are displayed as portions, usually percentages, of a circlescatter diagrams points are connected to establish a trendbar graphs results for each year can be displayed as an upward or downward barand cross section graphs segments of data can be displayed horizontally.

You will deal with some of these in economics, but you will be dealing principally with graphs of the following variety. Certain graphs display data on one variable over a certain period of time. For example, we may want to know how the inflation rate has varied in the Canadian economy from We would choose an appropriate scale for the rate of inflation on the y vertical axis; and on the x horizontal axis show the ten years from to with on the left, and on the right.

We would notice right away a trend. The trend in the inflation rate data is a decline, actually from a high of 5.

We would see that there has been some increase in the inflation rate since its absolute low inbut not anything like the high. And, if we did such graphs for each of the decades in Canada sincewe would see that the s were a unique decade in terms of inflation. No decade, except the s, shows any resemblance to the s.

We can then discuss the trends meaningfully, since we have ideas about the data over a major period of time. We can link the data with historical events such as government anti-inflation policies, and try to establish some connections. Other graphs are used to present a relationship between two variables, or in some instances, among more than two variables.

Consider the relationship between price of a good or service and quantity demanded. The two variables move in opposite directions, and therefore demonstrate a negative or indirect relationship. Aggregate demand, the relationship between the total quantity of goods and services demanded in the entire economy, and the price level, also exhibits this inverse or negative relationship.

If the price level based on the prices of a given base year rises, real GDP shrinks; while if the price level falls, real GDP increases. Further, the supply curve for many goods and services exhibits a positive or direct relationship. The supply curve shows that when prices are high, producers or service providers are prepared to provide more goods or services to the market; and when prices are low, service providers and producers are interested in providing fewer goods or services to the market.

The aggregate expenditure, or supply, curve for the entire Canadian economy the sum of consumption, investment, government expenditure and the calculation of exports minus imports also shows this positive or direct relationship. Construction of a Graph You will at times be asked to construct a graph, most likely on tests and exams. You should always give close attention to creating an origin, the point 0, at which the axes start. Label the axes or number lines properly, so that the reader knows what you are trying to measure.

Most of the graphs used in economics have, a horizontal number line or x-axis, with negative numbers on the left of the point of origin or 0, and positive numbers on the right of the origin. Figure 2 presents a typical horizontal number line or x-axis. In economics graphs, you will also find a vertical number line or y-axis. Here numbers above the point of origin 0 will have a positive value; while numbers below 0 will have a negative value. Figure 3 demonstrates a typical vertical number line or y-axis. When constructing a graph, be careful in developing your scale, the difference between the numbers on the axes, and the relative numbers on each axis.

## Quantity Supplied and Price: Functional Relationship

The scale needs to be graduated or drawn properly on both axes, meaning that the distance between units has to be identical on both, though the numbers represented on the lines may vary. You may want to use single digits, for example, on the y-axis, while using hundreds of billions on the x-axis.

Using a misleading scale by squeezing or stretching the scale unfairly, rather than creating identical distances for spaces along the axes, and using a successive series of numbers will create an erroneous impression of relationship for your reader.

If you are asked to construct graphs, and to show a knowledge of graphing by choosing variables yourself, choose carefully what you decide to study. Here is a good example of a difficulty to avoid. Could you, for example, show a graphical relationship between good looks and high intelligence? I don't think so. First of all, you would have a tough time quantifying good looks though some social science researchers have tried!

Intelligence is even harder to quantify, especially given the possible cultural bias to most of our exams and tests. Finally, I doubt if you could ever find a connection between the two variables; there may not be any. Choose variables that are quantifiable.

Height and weight, caloric intake and weight, weight and blood pressure, are excellent personal examples. The supply and demand for oil in Canada, the Canadian interest rate and planned aggregate expenditure, and the Canadian inflation rate during the past forty years are all quantifiable economic variables.

You also need to understand how to plot sets of coordinate points on the plane of the graph in order to show relationships between two variables. One set of coordinates specify a point on the plane of a graph which is the space above the x-axis, and to the right of the y-axis. For example, when we put together the x and y axes with a common origin, we have a series of x,y values for any set of data which can be plotted by a line which connects the coordinate points all the x,y points on the plane.

Such a point can be expressed inside brackets with x first and y second, or 10,1. A set of such paired observation points on a line or curve which slopes from the lower left of the plane to the upper right would be a positive, direct relationship.

A set of paired observation or coordinate points on a line that slopes from the upper left of the plane to the lower right is a negative or indirect relationship. The upcoming discussion will update you about the functional relationship between the quantity supplied and price. There exists a direct or positive relationship between price and quantity supplied.

The law of supply states that, ceteris paribus, as the price of a commodity rises falls its supply rises falls.

When this price- quantity relationship is plotted on a graph we get a supply curve that slopes upwards. Thus the law of supply can be explained by drawing a supply curve for a commodity. To do this, we now illustrate the relationship between price and quantity supplied with the following hypothetical data for a producer of good X.

The data can be presented either in the form of a schedule or a graph. The supply schedule shows the relationship between the quantity supplied and the price. It is a numerical tabulation that lists some prices and shows the quantity that will be offered for sale at each price. The supply schedule as shown here suggests that nothing would be offered for sale when price is Rs. If price rises to Rs. Each price- quantity combination is shown by a reference letter as t, u, v, etc.

Direct & Indirect Relationships - 10.711.04

The data presented in Table 4. Note that a supply curve is a graph of the supply schedule. The supply curve does not start from the origin.