David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

CHAPTER 2 Tools of economic analysis
0 Questions
(a) What effort level must David make in order to land his job with Greenpeace?
(b) What effort level does Samantha have to make?
(c) Which student is better at exams?
(d) Give three possible reasons for the different exam performance of David and Samantha.
To check your answers to these questions, go to page 683.
Other things equal is
a device for looking at the
relationship between two
variables, but remembering
other variables also matter.
Figure 2.7
Another look at 'other things equal'
A diagram might help London Underground think about tube fares. Apart from
tube fares, the key determinants of passenger use are probably the incomes that
passengers have available to spend, and the introduction of the congestion charge
in 2003, which induced some Londoners to abandon their cars in favour of public
transport.
In the period 1999/00-2008/09, Britain's national income, adjusted for inflation,
grew substantially, with the exception of the year 2009 because of the economic recession. Look again at
Table 2.7. Even if tube fares had been constant, rising incomes should have led to (and did lead to) rising
tube use and rising tube revenues.
Once we allow for movements in both tube fares and incomes of passengers, our analysis makes more
sense. Imagine two sub-periods, one in which incomes were low and one in which incomes were high.
Figure 2.7 shows the relationship between tube fare and tube revenue in each period separately. The orange
line corresponds to low incomes and hence low passenger demand for tube journeys. The blue line shows
greater demand for the tube at each and every potential level of tube fares.
High income
Real fare
Other things equal
Low income
During 1999/00-2008/09 we moved from points near the
bottom of the blue line to points near the top of the orange
line. Tube revenue increased not merely because fares rose
but also because incomes rose. Similarly, the introduction of
the congestion charge for car use in London increased the
demand for tube journeys at any particular level of fares and
income.
The axes of Figure 2. 7 encourage us to think about the
relationship between fares and revenue. Other things equal,
higher fares yield higher revenue and we move along the
upward-sloping line. When one of these other things (like
income or congestion charging) changes, we show this as a
shift in the line. Now we can draw two-dimensional diagrams
without neglecting other determinants. When things not
drawn on the axes change, lines (or curves) shift.
The same reasoning applies to the introduction of the congestion
charge on vehicle use after 2003. Other things equal, fewer
people drove cars and more people used the tube. As with the
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