Real World Uses of Linear Equations
Learning linear equations in an academic setting may focus too much on theoretical applications instead of practical application. In truth, linear equations help people analyze and understand several real world situations. As with theoretical applications, real-world situations modeled with a linear equation often relate two variables. The resulting linear equation helps show how much a change in one of the variables affects the other.
Demand Curve
In business economic analysis, the demand curve is a linear equation that illustrates the inverse relationship between two variables: the quantity of a particular good and its price. Modeling this relationship illustrates how price affects the willingness or ability of a consumer to buy a certain product. This demand schedule shows how much of a product or service consumers are willing to purchase at varying price levels.
A product with a high price will have low demand; people buy less of the product because it is so expensive that few can afford it. In turn, if the price of the product is low, more people can afford it. Because every price corresponds to a specific quantity of products that may be sold, businesses have a better idea of price products.
Interest Rates and Investment
In the finance industry, the inverse relationship between interest rates and investment by individuals and businesses may also be modeled with a linear equation. In this case, the linear equation helps illustrate how much the level of investment changes as interest rates either increase or decrease.
The linear equation relating interest rates to investment will show that high interest rates correlate to low investment levels. However, if interest rates are low, investment activity may increase.
Currency Exchange Rates
The foreign exchange rate tells you the price of one currency in terms of a foreign currency. Say for example that you want to convert U.S. dollars into British pounds. You use your dollars to buy pounds and receive the value of your dollars in British currency. Depending on the currency exchange rate of the British pound, you may be able to buy more or less British pounds with your U.S. dollars. This relationship between currencies may also be modeled with a linear equation.
In this case, the two variables are U.S. dollars and British pounds. From the foreign exchange rate you know that one U.S. dollar buys a certain number of pounds, two dollars buys a certain amount of pounds, and so on. If you model this data, you will be able to see how many pounds you may be able to buy with a specific amount of dollars under the exchange rate.
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