Micro Graphs

Calculate the area of consumer or producer surplus triangle by using this formula: 1/2 (Base x Height)

Price Ceiling
With a binding price ceiling, here the quantity sold is 15, and the price is $3, and there is a shortage.

Price Floor

With a binding price oor, here the quantity sold is 15, and the price is $7, and there is a surplus.

Supply and Demand with Tax

The vertical distance between the curves S and S + Tax is the size of the tax. After the tax the new price is $7 and
the quantity is 15. While consumers pay $7, producers receive $3 after the tax is paid.

Tax with Burden Falling on Consumers

As the demand curve is more inelastic than the supply curve, consumers pay more of the tax.

Tax with Burden Falling on Producers

As the supply curve is more inelastic than the demand curve, producers pay more of the tax.

Perfect Competition in Long-Run Equilibrium

The rm is earning zero economic pro t and is in long-run equilibrium. The rm takes the
price in the market, and is a price taker.
Perfect Competition Earning Short-Run Pro ts
The rm is earning economic pro ts in short-run equilibrium as a result of an increase in demand in the
industry. As perfectly competitive markets have low barriers to entry and exit, pro ts will attract new rms, in
the long-run supply will increase in the market, and rms will return to zero economic pro t.

Perfect Competition Incurring Short-Term Losses

The rm is incurring economic losses in the short run as a result of a supply increase in the industry decreases
the price received by rms. As perfectly competitive markets have low barriers to entry and exit, in the long run
losses will force some rms to leave the industry and the remaining rms will return to zero economic pro t.
Monopoly in Long-Run Equilibrium
Monopolies earn economic pro ts in long-run equilibrium. At the pro t-maximizing MR = MC quantity
(QM), price (PM) comes from the demand curve.

Natural Monopoly
A natural monopoly’s regulated pricing could be at the fair-return price (P = ATC) or the socially optimal price
(P = MC). An unregulated monopoly produces where MR = MC and price comes from the demand curve. The
average total cost of a natural monopoly decreases as output increases.
Monopolistic Competition in Long-Run Equilibrium
Monopolistically competitive rms earn zero economic pro t in long-run equilibrium, and the demand curve is
tangent to ATC. There is easy entry and exit; if short-run pro ts exist, rms enter, and the demand curve
decreases for existing rms. If there are short-run losses, some rms leave, increasing the demand curve for
remaining rms.

Perfectly Competitive Labor Market

A rm that hires workers in a perfectly competitive labor market has to hire at the wage set in the labor market
and are wage takers. The pro t-maximizing quantity of an input hired is Marginal Revenue Product (MPR) =
Marginal Factor (Resource) Product (MFC).

Positive Externalities
At the Market Quantity (QMKT) there is a deadweight loss as the goods are underproduced. A per-unit subsidy
the size of the Marginal External Bene t (MEB) can remedy this, increasing production to the Socially Optimal
Quantity (QMKT, PS) where Marginal Social Bene t (MSB) = Marginal Social Cost (MSC).

Negative Externalities
At the Market Quantity (QMKT) there is a deadweight loss as the goods are overproduced. A per-unit tax the size
of the Marginal External Cost (MEC) can remedy this, reducing production to the Socially Optimal Amount
(QMKT, PS) where Marginal Social Bene t (MSB) = Marginal Social Cost (MSC).

Perfect Competition Incurring Short-Run Losses

The rm is incurring economic losses in the short run as a result of a supply increase in the industry decreases
the price received by rms. As perfectly competitive markets have low barriers to entry and exit, in the long run
losses will force some rms to leave the industry and the remaining rms will return to zero economic pro t.
Macro Graphs

The economy is in equilibrium and at full employment at E1. A decrease in aggregate demand shifts the AD
curve to the left. The new short-run equilibrium is E2. However, in the long run nominal wages and other
resource prices will fall. This increases short run aggregate supply causing SRAS to shift to the right. The new
equilibrium is at E3. This is a long- and short-run equilibrium as all three curves cross here. The lesson: a decrease
in AD can cause a recession in the short run, but it will not prevail in the long run.

Here the axes are the nominal interest rate and the quantity of money in circulation. An increase in the money
supply moves the equilibrium from E1 to E2. This decreases the nominal interest rate and, of course, there is
more money in circulation.
Notice the labels of the axes: real interest rate and quantity of loanable funds. An increase in the demand for
loanable funds, say because consumers are con dent, moves the equilibrium from E1 to E2. The real interest rate
is higher and the quantity of funds loaned and borrowed increases.
The Phillips curve has in ation on the vertical axis and unemployment on the horizontal axis. The economy
slides down the short-run Phillips curve (SRPC) from point A to point B when aggregate demand decreases.
The decrease in aggregate demand causes unemployment to increase and the price level to fall. Starting at point
A, an increase in unemployment and a reduction in in ation ends up at point B.
The long-run Phillips curve (LRPC) is vertical to indicate there is no relationship between in ation and
unemployment in the long run.
Notice the labels of the axes: real interest rate and quantity of loanable funds. An increase in the demand for
loanable funds, say because consumers are con dent, moves the equilibrium from E1 to E2. The real interest rate
is higher and the quantity of funds loaned and borrowed increases.