{"id":25942,"date":"2015-02-27T10:32:31","date_gmt":"2015-02-27T10:32:31","guid":{"rendered":"http:\/\/vskills.in\/certification\/blog\/?p=25942"},"modified":"2024-04-03T13:15:47","modified_gmt":"2024-04-03T07:45:47","slug":"linear-functions-in-economics","status":"publish","type":"post","link":"https:\/\/www.vskills.in\/certification\/blog\/linear-functions-in-economics\/","title":{"rendered":"Linear functions in Economics"},"content":{"rendered":"<p style=\"text-align: center\"><a ref=\"magnificPopup\" href=\"http:\/\/vskills.in\/certification\/blog\/wp-content\/uploads\/2015\/02\/Linear-functions-in-Economics.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-25998\" alt=\"Linear functions in Economics\" src=\"http:\/\/vskills.in\/certification\/blog\/wp-content\/uploads\/2015\/02\/Linear-functions-in-Economics.png\" width=\"284\" height=\"177\" \/><\/a><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-size: medium\"><span style=\"color: #000000\"><span style=\"font-family: Times New Roman\">Linear functions are the simplest way to define relationships between variables in economics. They are of the form:<\/span><\/span><\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-size: medium\"><span style=\"color: #000000\"><span style=\"font-family: Times New Roman\">y=a + bx<\/span><\/span><\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-size: medium\"><span style=\"color: #000000\"><span style=\"font-family: Times New Roman\">If you plot this equation on a graph, it will form a straight line. \u2018a\u2019 is the intercept on the Y-axis (that is the point on the Y-axis where the line meets the Y-axis) and \u2018b\u2019 is the slope. They are the parameters that describe the linear relationship between x and y.<\/span><\/span><\/span><\/p>\n<p><span style=\"font-size: medium\"><span style=\"color: #000000\"><span style=\"font-family: Times New Roman\">Here y is the dependent variable and x is the independent variable. A linear relationship is where the change in y is always b times the change in x, irrespective of the level of x. Thus the marginal effect of x on x on y, the slope, is constant. That is why the graph is a straight line as it has a constant slope. The slope, as stated above, is the ratio of the change in y to the change in x. It thus gives us a measure of the change in y relative to the change in x. If the slope is positive, x and y have a positive relationship i.e. of x increases, y increases as well and vice versa. If the slope is negative, x and y are negatively related, i.e. they when x increases, y decreases and vice versa.<\/span><\/span><\/span><\/p>\n<p><span style=\"font-size: medium\"><span style=\"color: #000000\"><span style=\"font-family: Times New Roman\">For example, let\u2019s consider the relationship between expenditure on holidays and vacations in a linear form. <\/span><\/span><\/span><\/p>\n<p><span style=\"font-size: medium\"><span style=\"color: #000000\"><span style=\"font-family: Times New Roman\"><i>Expenditure on holidays and vacations<\/i>=102 + 0.13 <i>disposable income.<\/i><\/span><\/span><\/span><\/p>\n<p><span style=\"font-size: medium\"><span style=\"color: #000000\"><span style=\"font-family: Times New Roman\">Thus when disposable income (after-tax income) increases by 1 rupee, expenditure on holidays and vacations increases by 0.13 rupees. The intercept in this equation denotes the expenditure when disposable income is zero. Here it is 102 rs. This is obviously incorrect, a family with no income will not spend on holidays. This is the drawback of a linear relationship, and hence we require non-linear equations\/functions to model an economic relationship better at lower levels of income. <\/span><\/span><\/span><\/p>\n<p><span style=\"font-size: medium\"><span style=\"color: #000000\"><span style=\"font-family: Times New Roman\">Here 0.13 is also the Marginal propensity to consume (spending on holidays and vacations) (MPC), that is the change in consumption caused by a change in income. As you can see, it remains constant irrespective of the level of income, which is also not true in real life. Different levels of income have different MPCs, as the share of spending on holidays and vacations in one\u2019s change in income would be different for households with different level of income and hence the relative change in both quantities would be different as well.<\/span><\/span><\/span><\/p>\n<p><a href=\"http:\/\/www.vskills.in\/certification\/accounting-banking-and-finance\">Click here for government certification in Accounting, Banking &amp; Finance<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>&nbsp; Linear functions are the simplest way to define relationships between variables in economics. They are of the form: &nbsp; y=a + bx &nbsp; If you plot this equation on a graph, it will form a straight line. \u2018a\u2019 is the intercept on the Y-axis (that is the point on the Y-axis where the line&#8230;<\/p>\n","protected":false},"author":612,"featured_media":25998,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_joinchat":[],"footnotes":""},"categories":[1519],"tags":[1568,2351],"class_list":["post-25942","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-accounting-banking-and-finance","tag-economics","tag-mathematical-model"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v22.3 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Linear functions in Economics - Vskills Blog<\/title>\n<meta name=\"description\" content=\"linear function, slope, economics, marginal propensity to consume\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.vskills.in\/certification\/blog\/linear-functions-in-economics\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Linear functions in Economics - 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