Economists Models Graphs

Economists are all for being logical and precise and due to this they use a lot of algebra and math. Another thing is that they also like presenting their ideas in a very intuitive and easy way to understand and that is why graphs are used.

Simplifying the Reality Is a Beneficial Thing: The graphs that economists use are almost always visual representations of economic models. An economic model is a mathematical simplification of the reality that allows you to concentrate on what is really important, leaving out an amount of irrelevant details.

An example of this can be seen in a model of demand of the consumer and is based more on the way the prices affect the quantities of goods and services that the people want to buy. Obviously other things, such as changes that occur in fashion or tastes, also influence on the demand of the consumer, but the price is fundamental. Let’s take a look at the price of bottled water for example. The price of bottled water is the main factor that will determine how many people is going to buy it. In this case it would be convenient to subtract all the other factors and concentrate only on how the price of bottled water affects the amount of bottled water people want to buy. 

The Demand Curve: Lets imagine that there are some economists that decide to do a survey on some consumers. They would ask them first of all how many liters of bottled water they would buy a month at three imaginary prices: $10 per liter, $5 per liter, or $1 per liter.

A chart depicting these results would probably look somewhat like this: 

Price

Liters

$10

1

$5

5

$1

10
Economists refer to the amount of people that are willing to buy the different prices as the demanded amount or simply, demand. The above information is that the price of bottled water and the quantity of demand of the same have an inverse relationship between them, one increases, while the other decreases.

Since this inverse relationship between the price and the amount in demand is so universal and is valid for almost all goods and services, the economists refer to it as the Law of Demand. The Law of Demand is much more interesting if it can be visualized though.

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