Understanding Common Economics Graphs - Part 1

Have you ever looked at a graph, stared at it for so long, and eventually just closed the piece containing it? It can be argued that almost anyone who has come across an economics graph has had this initial reaction, especially when the graphs look similar to this:

P.S. A little backstory: In my second year of high school (equivalent to SS2 in Nigeria), I came across this graph, and I kid you not, I was traumatized. I began to question if economics was for me and if I was sure I wanted to walk down this path. Now, I look back at those moments and smile because I still have an unusual level of interest in this field.

Hence, my argument is not that the graphs are not complicated. Rather, it is that they are a lot easier to understand than we think. I'll show you.

Common Economics Graphs- Part 1

To keep this article succinct, I have picked out the most basic graph among the plethora of economics graphs to discuss.

1. The Demand-Supply Graph: As an individual, what motivates you to purchase an item (a commodity) is its price and your willingness to pay. Another factor could be your knowledge of its availability. For example, you might choose to purchase a commodity because you know it’s rare and only a select few people have it. This is what is referred to as demand. Economics Online defines demand as “the willingness and ability of buyers to buy different quantities of a good at various prices in a given time period, ceteris paribus.” [1]

Supply, on the other hand, is the opposite of demand. Let’s say, for example, you work at a company and are paid $25/hr. In a typical week, you work for 40 hours, allowing you to earn $1,000 before taxes. After a year in the company, you decide to ask for a raise. The number of hours you work in a week may not change as you have become more efficient at your job; however, your pay does. If your request is granted, you go from earning $25/hr to $30/hr, allowing you to earn $1,200 weekly while still working 40 hours. It might not seem very obvious, but the law of supply has just taken place. According to Economics Online, “the law of supply states that there is a positive or direct relationship between the price of a good and the quantity supplied, ceteris paribus.” In this case, what you are willing to supply more of at a greater pay is a more efficient job. Thus, the higher you get paid, the more likely you are to efficiently complete your work. All this can be easily explained using the graph below:

Clearly, in this graph, one line goes up, and the other one goes down. When it comes to graphs generally, when a line goes up at a diagonal angle, it signifies that there is a positive relationship between the x and y axes. The line going up is called the supply curve, and it looks that way because of the positive relationship between price and quantity when it comes to supply. It is the opposite in the case of demand because of the negative relationship between price and quantity when it comes to demand.

Just like that, you now know what the demand-supply curve means! Of course, there is more, and I will go into more detail about how the concept of demand and supply comes into play in the other graphs we discuss as well.

Look out for the next issue!