Understanding Common Economics Graphs - Part 2

This article is a continuation of the piece published last week, which can be found here. This week, we will dive a little deeper into graph concepts. However, before that, it would be best to first answer the question: Why use graphs in Economics?

Graphs are prevalent in economics, particularly due to a concept called ceteris paribus, a Latin phrase meaning "all other things being equal." When applied to analysis, this concept focuses on the variables being studied while holding other variables constant. This allows graphs to be used effectively because they can easily illustrate the relationship between two variables (e.g., quantity demanded and price) and show how a change in one influences the other.

In reality, the economy is dynamic, and these variables are not constant. However, taking all the various factors into account without holding any constant would be inefficient and nearly impossible to work with. Therefore, using graphs under the assumption of ceteris paribus simplifies the analysis, making complex economic relationships more understandable.

My Key to Understanding Graphs

Graphs can certainly be intimidating. Until recently, whenever I saw a graph, my first instinct was to flip the page. However, over time, I have developed ways to help me understand these graphs better.

Google the Graph

Sometimes, the language in a text accompanying a graph can be complicated and advanced. Breaking down the terminology to understand what the graph illustrates can be time-consuming. In such cases, Google can be a great help. If the graph is popular, there’s a high chance you'll find blogs, videos, or other resources where the graph is explained in simpler terms. I highly recommend using this resource to make life easier.

Always Remember the Basics

This might seem obvious, but it can be challenging to apply as you progress academically. Think of graphs as buildings constructed on a foundation. If you understand the basics well enough, you'll find it easier to grasp more advanced graphs. For example, the graph below may seem more complex than the demand and supply graph shown in the last publication, but it's simply built upon that foundation. Price ceilings and floors are identified because of the presence of demand and supply curves in the graph. I put a link to a publication that explains these concepts at the end of the article. TLDR: Always remember the basics and try not to overcomplicate the meaning behind the graphs. They are often more straightforward than we think.

Graph by The Economic Times

Ask Very Simplistic Questions First

Instead of asking, "What was the percentage increase in variable X over period Y?" When initially analyzing a graph, start with simpler questions like: "Why is this line falling?" "Why is there a gap between points X and Y?" "Why is the line straight between points X and Y?" and "Why does it dramatically go up at point Z?" Look at the graph and ask questions based on what you see. This approach helps you understand why the graph looks the way it does and makes it easier to comprehend the information it represents. It can be challenging, especially if you are advanced in your studies, but this method is valuable for deeper understanding.

Redraw the Graph

When a graph seems difficult to understand, try redrawing it. Don't just copy and paste what you see; redraw it in steps, like solving a math problem. Before moving to the next step in recreating the graph, ask yourself, "What comes next?" This method plays on your understanding and helps you think like the graph's creator. By the time you finish, you'll likely either understand the graph or at least become more familiar with some aspects.

Practice Solving/Answering Questions with the Graph

This is my favourite way of learning graphs. Depending on the graph's nature and the information it represents, a graph as an illustration most likely answers a question. In high school, after being introduced to supply and demand graphs, we were tasked with finding certain variables using the graph. Practice questions were available, which were very helpful. I would read those questions and try to find the answers. Consistent practice made me so familiar with the graphs that eventually, I didn’t need to draw them all the time anymore. Practice answering questions with the graph and you will get more familiar with the concept it illustrates.

Resource

A detailed article on price control: https://www.investopedia.com/terms/p/price-controls.asp