1) Draw an Upward sloping Graph
Define a consumption function: Shows the relationship between X and Y-axis. In this case it shows the relationship between income(Y) and savings(S).
What does a consumption function look like: Graphs are read from the left to the right. The line of this graph is going upward as we read from the left to the right.
Identify Independent and dependent variable: In math the dependent variable is always on the Y-axis and the independent variable is always on the X-axis. This is not always the case in economics. In a consumption function, income is the independent variable since it influences the savings which is the amount of money you have left to spend later.
What can you say about the slope of the consumption function? : When calculating the slope using Y1-Y2/X1-X2, the slope of a consumption function will always be positive. How do you interpret the number? If X increases by 1, we ask ourselves by how much will Y change? If the slope of the consumption function is 0.25, we say if income rises by 1$, we will consume 25 cents of that dollar.
What is the relationship between consumption and income? : If we take 2 points on the graph, as we move from point B to point C, income will increase and so will the consumption. There is a direct or positive relationship between income and consumption if they move in the same way.
Equation of the consumption function:
If the y intercept is -100 and the slope is 0.25 the equation is C=(-100)+0.25y
C is the consumption and is measured on the vertical axis
-100 is the Y intercept and is the point that touches the vertical axis. It is the value of consumption when income is zero
0.25 is the slope and the marginal propensity to consume
Income is measured on the horizontal axis
2) Draw a downward sloping graph
Define the graph: It shows the relationship between the X and Y-axis. In this case it shows the relationship of income(Y) and price(P)
What does it look like? : when we look at a graph we read it from left to right. In this graph we can see the line goes downward as we read it from left to right.
Why does it start above the origin? : Because if X is equal to zero, Y is a positive number
Identify the independent and the dependent variable: In