Economics is a social science that attempts to understand how supply and demand control the distribution of limited resources. Since economies are dynamic and constantly changing, economists must take snapshots of economic data at specified points in time and compare them to other fixed timed data sets to understand trends and relationships. To understand the relationships between these variables, economists use graphs to visually interpret and explain complex ideas.
Since economists take snapshots of data, a graph of these data points helps to illustrate the movements and trends over time. Sets of information written on paper are hard to translate into understandable bits of information. However, when economists put information on a graph, it is easy to see if over time the data is increasing, decreasing or stagnant. For example, a data set of gas prices over time could be plotted on a graph to quickly see when prices were increasing and when they were decreasing.
Graphs in economics can show the relationship between two variables. For example, a classic economic graph would be the cost of a product on one axis and the amount purchased on the other axis. This graph would illustrate how much goods would be purchased at different price points. This graph could help a company determine how much of a good to produce and where to price their product for maximum profit.
Graphs of two different data sets can help to explain the relationship between economic data. If graphed data shows two parallel lines, it can be inferred that both data sets increase and decrease at the same rate. If the graphed data crosses in an x formation, it is understood that as one data point increases, the other one decreases. For example, if the amount of gasoline used in California and Alabama is graphed, it would probably result in two parallel lines with California using a greater amount of gasoline than Alabama, but with similar increases and decreases in gas usage based on price changes.
Economic graphs can help to illustrate what happens when there is a shift or change in variables. For example, if demand for a good is stable but supply suddenly drops due to resource constraints, the supply line on a graph will shift. This line shift graphically illustrates how cost will increase and demand decrease for a good.
One of the classic uses of graphs in economics is to determine equilibrium and break even points. For example, the standard supply and demand graph results in an x shape. The point at which the supply and demand lines intersect is equilibrium. This equilibrium is where the supply of a good and the demand of a good for a given price are equal.