ECONOMICS

DIAGRAMS
PRODUCTION POSSIBILITY DIAGRAMS
 Capital
goods

Consumer
goods

Production possibility frontier - macroeconomy

 Capital
goods

PPF2
PPF1

Consumer
goods

Outward shift in production possibility frontier – balanced economic

growth
 Consumer
goods

PPF1 PPF2

Capital
goods
Increase in production possibility where change in technology affects the output of
capital goods but not the output of consumer goods; Point W currently
unattainable
 Capital
goods

Before war

After war

Consumer
goods

Impact of war on production possibility frontier

ECONOMICS
DIAGRAMS
SIMPLE MARKET DIAGRAMS
 Price

Quantity

Demand curve
 Price

Movement from A to B = extension of

quantity demanded due to a fall in
the price of the product
A

Quantity

Extension in demand
 Price
Movement from A to B
= contraction
B

Shift from D1 to D2 =
decrease / fall D1 D

Quantity

Contraction in demand vs decrease in demand

 Shift from D1 to
Price
D2 because more will
be demanded at each
and every price

Dmarket
D2 D3
D1

Quantity

Increase in demand – demand shifts right; market demand is the sum

of demand for individual firms
 Price of
cookies

Quantity
of cookies

Demand curve in the cookie market

 Complements Substitutes
Price of Price of
Good B Good B

Quantity Quantity
of Good A of Good A

Diagrams showing complements and substitutes

 Price

Quantity

Supply curve
 Price of
coffee
S

Quantity
of coffee

Supply curve in the coffee market

 Price
S

Q Quantity

Market equilibrium
 Price S

Q Quantity

Market diagram equilibrium – relatively price inelastic demand and

supply
 Price
S

P1

D
D1
Q1 Q Quantity

Decrease in market demand showing the impact on market equilibrium

 Price
S

P1

D1

D
Q Q1 Quantity

Increase in market demand showing the impact on market equilibrium

 Price
S

S1

P1

D
Q Q1 Quantity

Increase in market supply showing the impact on market equilibrium

 Price
S1
S

P1

Q1 Q Quantity

Decrease in market supply showing the impact on market equilibrium

 Price of S1
coffee
S

P1

12.1 13.1 Quantity of coffee

(million bags)

Impact of decrease in market supply of coffee on the equilibrium price

and quantity of coffee
 Price of
coffee S

P1 B
A
P

D1

D
C
0
Q Q1 Quantity of
coffee

Impact of increase in market demand for coffee on the equilibrium

price and quantity of coffee; increase in producer surplus from ACP to
BCP1
 Price of
S1
Coffee
S

P1

D1

Q Quantity of
Coffee

Impact of decrease in market supply and increase in market demand in

coffee market on the equilibrium price and quantity of coffee
 Price of S
solar
power S1

P1

Quantity of
solar power

Decrease in the price of solar power caused by an increase in the supply

of solar power
 Price of
housing
S

P1

Shortage
at original D1
price D
Q Q1 Quantity of
housing

Adjustment to new market equilibrium in housing market after an

increase in market demand showing excess demand at original price
 Price

P2 The increase in price is

proportionally much
larger than the fall in
quantity demanded
P1

Q2 Q1 Quantity

Price inelastic demand curve

 Price

The increase in price is

proportionally much
smaller than the fall in
P2 quantity demanded

P1

Q2 Q1 Quantity

Price elastic demand curve

 Price

ELASTIC
P1 W

P2 X
F
INELASTIC

G Y
P3
J H Z
P4

0 Q1 Q2 Q3 Q4 Quantity

Changing price elasticity of demand along a straight-line demand curve

(PED is not the gradient); letters can be used to analyse the impact on
total revenue at each point along the demand curve
 Price

ELASTIC

INELASTIC
UNITARY

Quantity

Unitary price elasticity of demand at midpoint (PED = -1)

 PRICE
120 ELASTIC
100

INELASTIC
50 PED = -1 i.e. unitary

DEMAND

0 50 100 150 QUANTITY

Changing PED along a straight-line demand curve, including numbers

for deeper analysis
 Costs and
Revenue

AR = D

A B Output

PED elastic at A and inelastic at B

 Price The increase in price is
proportionally much
smaller than the rise in
quantity supplied S

P2
P1

Q1 Q2 Quantity

Price elastic supply curve

 Price
S

P2 The increase in price is

proportionally much
larger than the rise in
quantity supplied
P1

Q1 Q2 Quantity

Price inelastic supply curve

 Price of
S
healthcare

Market
price

D
Zero price
Q Q1 Quantity of
Waiting list healthcare

Healthcare market: excess demand (waiting list) when healthcare is

provided free at the point of use eg. NHS
 ECONOMICS
DIAGRAMS
CONSUMER AND PRODUCER SURPLUS, AND TOTAL
REVENUE
 Revenue
/ price P1

a
P

AR = D

Q
Output

Consumer surplus
 Price
Supply

A
P2

B D
P
E
C

Demand

O Q2 Q1
Quantity

Changes in consumer and producer surplus when price rises from P to P2

Consumer surplus decreases from A+B+D to A and producer surplus changes from
C+E to B+C
 Price

Q Quantity

Total revenue at the equilibrium price and quantity (TR = P x Q)

 Price

P1

P2

Q1 Q2 Quantity

Change in total revenue following a fall in price (TR=PxQ)

 Price
S

P + 5p
P

Q1 Q Quantity

Change in total revenue after a 5p increase in price

 Price

Revenue
Original
Total
P1

New Total Revenue

D

Q Q1 Quantity

Impact of a fall in price on total revenue (PXQ changes to P1xQ1)

 Costs and
Revenue

AR = D

A B Output

Total revenue = price x quantity, using AR rather than D

 15

S S1
Price
(£s)

10

D
5000 7000 Quantity

Increase in supply changes total revenue from £10x5000 to £8x7000

 Price

£4
£3

AR = D

7 8 Output

Change in total revenue when price changes. At price = £3, total

revenue = £3x8; at price = £4, total revenue = £4x7
ECONOMICS
DIAGRAMS
MARKET INTERVENTIONS
 Price

Excess S
Supply
P

Qd Qs Quantity

Market diagram showing an excess supply

 Price
(£s)

D
6000 12000 Quantity
(kgs)
Excess supply at £3 is (12000-6000)kgs
 Price

Pmax

Qs Qd Quantity

Excess demand in market with maximum price

 Price S

P3

Excess
Demand

Qs Q Qd Quantity

Excess demand at price below market equilibrium price

 Price of
rice S

Max Price
e.g. $0.44
per lg
D

Qs Q Qd
Quantity of
rice
Excess
Demand

Intervention in the market for rice

 Price of
cocoa S

Price
ceiling

Price
floor

D
O
Q Quantity of
cocoa

Diagram showing a price ceiling (minimum price) and price floor

(maximum price) in the cocoa market
 P S + tax

P2

P1

Q2 Q1 Q

Impact of a specific indirect tax on the market

 Price S + tax

A
P1

P2
B

Q2 Q Quantity

Tax revenue from an indirect tax = P1ABP2

 Price of
petrol S + higher
tax

S
P1

Q1 Q Quantity of
petrol

Impact of an increase in an ad valorem tax on petrol on the market

price and quantity of petrol
 Price Price
D D S + tax

P1 S
S + tax
P1
S
P
P

Q Quantity Q Quantity

Impact of an indirect tax on market equilibrium price and quantity

when demand is perfectly price inelastic and (i) Supply is perfectly
elastic and (ii) supply is upward sloping. Blue areas indicate tax
 Price Price
S + tax

S
S + tax
P1
S P
P D

Q1 Q Quantity Q1 Q Quantity

Impact of an indirect tax on market equilibrium price and quantity

when (i) Supply is perfectly elastic and (ii) demand is perfectly
price inelastic. Blue areas indicate tax revenue raised from the tax.
 S1
P
S1 + subsidy

P1

P2

Q1 Q2 Q

Impact of a per unit producer subsidy on market equilibrium price and

quantity
 S
Price of
exports S+
subsidy
P

P1
Unit subsidy

Quantity
of exports

Impact of export subsidy on price of exports (vertical distance =

subsidy per unit)
ECONOMICS
DIAGRAMS
EXTERNALITY DIAGRAMS
 Costs and
Benefits MSC

Deadweight
P welfare loss

P*

MPB

MSB

Q* Q Quantity

Welfare loss in the market when there is a negative consumption

externality (MSB<MPB)
 Costs and
Benefits MSC
Deadweight
welfare loss

P*

MSB

MPB

Q Q* Quantity

Welfare loss in the market when there is a positive

consumption externality (MSB>MPB)
 Costs and
Benefits
MSC
Deadweight
welfare loss

MPC
P*

MSB

Q* Q Quantity

Welfare loss in the market when there is a negative production

externality (MSC>MPC)
 Costs and
Benefits
MPC

Deadweight MSC
P welfare loss

P*

MSB

Q Q* Quantity

Welfare loss in the market when there is a positive production

externality (MSC<MPC)
 Costs and
Benefits MSC

MPC

P*

MPB

MSB

Q* Q Quantity

Market equilibrium compared to social optimum equilibrium a market with both

negative production externality (MSC>MPC) and negative consumption
externality (MSB<MPB)
 Costs and MSC
benefits MPC

MPB

MSB

Q* Q Quantity

Market with negative consumption externality (MSB<MPB) and

negative production externality (MSC>MPC)
 Costs and
Benefits MSC

MPC

P*

P MSB

MPB

Q* Quantity

Market equilibrium compared to social optimum equilibrium a market

with both a negative production externality (MSC>MPC) and a positive
consumption externality (MSB>MPB)
 Costs and
Benefits MSC

MPC + tax

MPC
P*

MSB

Q* Q Quantity

Using a specific/unit indirect tax to internalise a negative production

externality
 Costs and
Benefits MSC

MPC

P*

MSB

Q* = 0 Q Quantity

Market where the best government intervention option is to ban the

good/service; social optimum at zero output
 Price / Price /
Costs and S (= MSC) Costs and S (= MSC)
Benefits Benefits

P* P

P P*
D full info D actual
(= MSB) (= MPB)

D actual D full info

(= MPB) (= MSB)
Q Q* Quantity Q* Q Quantity

Information failure (i) Demand increases when consumer have full

information (merit good) and (ii) demand decreases when consumers
have full information (demerit good)
 Costs and
benefits MSC
of
vaccines

P*

MSB

MPB

Q Q* Quantity of
vaccines

Positive consumption externality of vaccines

 Costs and
benefits MSC

P*

MSB

MPB

Q Q* Quantity

Positive consumption externality showing welfare loss area at market

equilibrium
 Price,
costs,
benefits MPC

MSC

P1

P*

MSB

Q Q* Quantity
Underproduction

Underproduction in market with a positive production externality

(MSC<MPC), with constant externalities
 Price,
costs,
benefits MSC

MPC

P*

MSB

Q* Q Quantity
Overproduction
Overproductionin market with a negative production
externality (MSC>MPC), with constant marginal external
 Price,
costs,
benefits
MSC

MPC
P*

MSB

Q* Q Quantity
Overproduction

Overproduction in market with a negative production

externality (MSC>MPC), with increasing marginal external costs
ECONOMICS
DIAGRAMS
LABOUR MARKETS
 Wage
Rate

MRP = DL

Quantity of
labour

Marginal revenue product curve

 Wage
rate SL

DL

QL Quantity of
labour

Labour market demand and supply in a competitive labour market

 Wage

Unemployment S of L

W2
Min Wage

W1

D of L

Q2 Q1 Q of L

Unemployment as a result of a minimum wage in a competitive labour

market
 Wage rate

S1

W1

Q Q1 Quantity of
labour

Labour market: Increase in the labour supply and the impact on

equilibrium
 Wage rate
S1

W1

Q1 Q Quantity of
labour

Labour market: Decrease in labour supply and the impact on

equilibrium
 WR
SL

P2

P1

DL2

DL1

Q1 Q2 QL

Labour market: increase in labour demand

 WR
SL

P1

P2

DL1

DL2

Q2 Q1 QL

Labour market: decrease in labour demand and the impact on

equilibrium
 Wage
rate Labour
Supply

W - TU

W1

Labour
Demand

E2 E1 E3 Employment

Impact on employment and unemployment of a trade union gaining a

wage increase
 Wage

S of L

WTU

W1

D of L

Q2 Q1 Q of L

Labour market: impact of trade union wage causing a fall

in employment (Q1 to Q2)
 Wage rate
£
S

New NLW

Original
NLW

Qd Qs Quantity of
labour

Labour market: Impact of an increase in the National Living Wage

(new excess supply of labour =QdQs = real wage unemployment)
 Wage rate MCL
/ labour
costs
ACL = SL

MRP = DL

Quantity of
labour

Monopsony labour market, without equilibrium indicated

 Inelastic labour demand Elastic labour demand
and supply and supply
Wage SL Wage
Rate Rate

SL

DL

DL

Quantity Quantity
of labour of labour

Wage elastic and inelastic labour demand and supply

ECONOMICS
DIAGRAMS
COST AND REVENUE DIAGRAMS
 Costs and
Revenue
TR

Output

Total revenue curve for a price taker (perfect competition)

 Revenue TR

TR1

Output

Decrease in total revenue for a price taker (perfect competition) due to

fall in market price
 Costs and
Revenue

MR

Output

Marginal Revenue MR curve for a price taker (perfect competition);

MR is the gradient of the TR curve
 Revenue

Price
AR = MR

Output

Average and marginal revenue curves for a price taker (perfect

competition)
 Costs and
Revenue

TR

Output

Total revenue curve for a price maker (imperfect competition)

 Costs and
Revenue

AR = D

Output

Average revenue curve for price maker

 Revenue

AR = D

MR Output

Average and marginal revenue curves for price makers

(imperfect competition)
 Costs and
Revenue

TR

AR

Output
MR

Relationship between total, average and marginal revenue for price

taker
 Costs and
Revenue

PED = -1

AR

Output
Elastic MR Inelastic
demand demand

Outputs showing elasticity of demand derived from AR = D curve

 Costs and Price falls but total revenue When MR = 0, total revenue is
Revenue rises – we know this because maximised
MR is positive PED is unitary

PED is elastic

Price falls and total revenue

falls – we know this because
MR is negative

PED is inelastic

AR

MR Output

Relationship between PED and MR and AR curves

 Revenue

TR TR1

Output

Increase in total revenue for a price maker (imperfect competition), due

to increase in demand
 PRICE MAKERS Total PRICE TAKERS
Total
revenue
revenue

TR

TR
Output Output

Costs and
revenue

AR = MR

Output

Revenue curves for price makers and price takers – a comparison

 C
Output

B
TP

Quantity
D of labour
Average
and
Marginal E
Product

AP

F
Relationship between total product curve and average product and marginal Quantity
product curves. AP = TP/Qlab; MP is the change in TP when one more unit of MP
labour is added – it is the gradient of the TP of labour
 Output /
product

AP

Relationship MP
between
MP and AP
Q Labour
curves and Costs
and MC
MC and AC Revenue
curves (Law
AC
of Diminishin
g Returns)

Q Output
 Costs
TC

TVC

TFC

Output

Total cost curves: TFC + TVC = TC

 Costs

TFC

AFC

Output

Total fixed cost and average fixed cost curves

 Costs

AFC

Output

Average fixed cost curve

 Costs

ATC

Output

Average total cost curve

 Costs and
Revenue

ATC

AFC

Output

Average fixed cost and average total cost curves

 Costs and
Revenue

ATC

ATC1

Output

Fall in average total costs

 Costs ATC

AVC

AFC

Output

Average fixed, average variable and average total cost curves (ATC=
AFC+AVC)
 Costs and ATC
Revenue MC

AVC

AFC

Output

Short run cost curves (MC always cuts ATC and AVC curves at their
minimum points)
 Costs and
Revenue

AC

D E F Output

Total costs = average cost x output TC=AC x Q

 Costs and
Revenue
MC

Output

Marginal cost curve

 Costs

MC
ATC

Output

MC must cut ATC at its minimum point

 Cost / rev

LRAC

P2
P1

Q1 Q2 Output

Long run average cost curve

 Costs
LRAC

Constant
Returns to Scale

Economies of Diseconomies of
Scale Scale

Q1 Q2 Output
MES

Long run average cost curve showing the returns to scale; productive
efficiency (minimum LRAC) between Q1 and Q2. Q1 is the minimum
efficient scale MES
 Costs

LRAC1

LRAC2

External
economies of
scale

Output

External economies of scale (LRAC shifts down)

 Costs and
Revenue

Attainable AC
= actual AC

Output

X-efficiency: Attainable AC = Actual AC

 P/C

Tesla LRAC curve

B
C1

C2 LRAC

Q1 Q2 Q

Long run average cost curve for Tesla (Point B shows some X-
inefficiency)
 Costs and
Revenue
MC
MC1
AC
AC1

Q Output

Shift down in MC and AC after a decrease in variable costs

 Costs and
Revenue AC1
MC

AC

Output

Impact of an increase in fixed costs on the average total cost curve; no

change in MC
 Costs and
Revenue ATC1

ATC

AFC1

AFC

Output

Impact of an increase in fixed costs on the average fixed cost curve and
average total cost curve
 Supernormal TC
Costs and
Revenue profit

TR

Output

Total cost and total revenue for a price taker (perfect competition)
 Costs and
Revenue MC

AC

P=C
MR = AR

Q Output

Perfect competition: Short run equilibrium

 Costs and
Revenue MC
Supernormal profit
= area CPAB
AC

A
P
MR = AR
C
B

Q Output

Perfect competition: short run supernormal profits

 Costs and
Revenue MC

AC

P
D = AR = MR

Q Output

Short run profit-maximising equilibrium for perfect competition

 Costs and
Revenue MC

AC

MR = AR
P=C

Q
Output

Perfect competition – long run equilibrium (Normal profit only)

 Short-Run Equilibrium

Price
MC
S Costs and
Revenue

AC

P P AR = MR

D
Quantity Q Output

Market determines the price taken by the perfect competitor in the

short run; supernormal profits can be made
 Long-Run Equilibrium

Price
MC
S Costs and
Revenue

AC
S1

AR1 = MR1
P1 P1

D
Quantity Q1 Output

Short run supernormal profits attract new firms to join the market increasing the
market supply and reducing the market price; this continues until all supernormal
profits of the perfectly competitive firm are competed away in the long run
 Costs and ATC
Revenue MC

AR = MR

AFC

Q Output

Area showing the total variable costs at the profit-maximising output in

perfect competition. (AVC = ATC – AFC and TVC = AVCxQ)
 Costs and
Revenue MC

AC

P
D = AR = MR

P1
D1 = AR1 = MR1

Q1 Q Output

Short run v long run equilibrium for perfect competition (Supernormal profit
is competed away as new firms join the market reducing the market price)
 Costs and
Revenue
MC

AC

AC1

AR = MR

Q1 Q Output

Impact on output of a fall in fixed costs in perfect competition

 Costs and
Revenue
MC

AC

AC1

P
AR = MR
C

Q Output

Impact on supernormal profit of a fall in fixed costs in perfect

competition
 Price

MC

AC

P
AR = MR
P1
AR1 = MR1

Q Q1 Output

Impact on output of a fall in the market price in perfect competition –

supernormal profit at price P becomes normal profit only at P1
 Costs and
Revenue MC

AC

AR

MR

Output

Cost and revenue curves for price maker (imperfect competition)

 Costs and
Revenue MC

AC
P

AR

Q Output
MR

Profit maximising output and price for a price maker

 Costs and
Revenue MC

AC
Pmon

C
AR

MR

Q Output

Supernormal profit for monopoly

 Cost / rev
MC

AC
a
P1

C1
b
AR

MR

Q1 Q

Profit maximising monopoly (output where MC =MR); supernormal

profit = P1abC1 or P1C1 x Q1
 MC
Costs and
Revenue
AC

AR

Q
MR Output

Loss minimising output and price for a price maker

 P/C/R
MC

AC
P1

P2

AR

MR

Q1 Q2 Q

Monopoly profit-maximising output (MC=MR) compared to

allocatively efficient output (MC=AR)
 Costs and
Revenue
MC perfect comp
MCmonop

Ppc

Pmon

AR

Qpc MR Qmon Output

Showing how the monopoly price could be lower than the price under
perfect competition if the monopoly can gain economies of scale
 Costs and
Revenue MC

AC

AR

Q1 Q4 Q5Q2 Q3 Output
MR

Q1 = profit-maximising output; Q4 = productively efficient output; Q5 =

allocatively efficient output; Q2 = revenue=maximising output; Q3 = sales-
maximising output
 Costs and
Revenue MC

AC

Rev max
profit

AR

MR

Rev max Output

quantity

Supernormal profit at revenue maximising output

 Costs and
Revenue MC

AC

AR

MR

Output

Total costs at revenue-maximising output

 Costs and
Revenue MC

AC

Normal
Profit
price
AR

MR

Normal Output
profit
quantity

Sales maximising output (while making normal profit AC=AR)

 Costs and
Revenue MC

LRAC
P1

Abnormal profit AE
P2 Normal profit
C1
PE
AR
MR

Q1 Q2 Output

Comparison of profit maximisation to sales maximisation in imperfect

competition
 P/C/R
MC

AC

P1

C1
C
AR

MR

Q1 Q

Monopoly operating at productively efficient output (minimum AC)

 Costs and
Revenue MC

AC

AR

MR

Q Output

Equilibrium of firm that has sales-maximisation goal (AC=AR and

normal profit only)
 Costs and
Revenue MC

AC
P
Supernormal
Profit

C
AR

MR

Q Output

Supernormal profit in short run for monopolistic competition

 Costs and
Revenue MC

AC

AR

Q
MR Output

Monopolistic competition long run equilibrium

 Costs and Short Run Equilibrium Long Run Equilibrium
MC Costs and
Revenue Revenue MC

AC
AC

AR AR

Q Output Q
MR
MR MR Output

Monopolistic competition short run and long run equilibrium.

Supernormal profit in the short run is competed away in the long run
 Costs and
Revenue MC

AC
P1
P

AR1

AR
Q Q1 MR1 Output
MR

Impact of an increase in demand or revenue on price and output and

profits for price maker
 MC1

Costs and
Revenue MC
AC1

AC
P1
P
C1

C
AR

MR
Q1 Q
Output

Impact of an increase in variable costs on supernormal profits for

price maker (Decrease from PCxQ to P1C1xQ1)
 Costs and
Revenue MC
AC1

AC
P
C1

C
AR

MR
Q
Output

Impact of an increase in fixed costs on supernormal profits

for price maker (Decrease from PCxQ to PC1xQ)
 Costs and
Revenue
MC

AC
P1
P

AR1

MR1 AR
Q Q1 MR Output

Impact of an increase in demand on price and output for a price maker

(imperfect competition)
 Costs and
Revenue
MC
AC1

AC
P

AR

MR
Q
Output

Increase in fixed costs in imperfect competition

 and Costs

and Costs
Revenue

Revenue
Off peak On peak

P1

P2
MC

MR AR MR AR
Q Output Q Output

price discrimination for off peak and on peak goods/services

 Costs and
Revenue
MC

AR
b
Output
MR

Oligopoly kinked demand equilibrium price and quantity for profit maximiser
MR is disjointed because of the kink in the demand (AR) curve
 Costs and
Revenue MC1

MC

AR = D
Q Output

Kinked demand in oligopoly: increase in costs has no impact on MR

equilibrium price and output; prices are rigid/stable/sticky
 Costs LRAC perfect
competition
P1

LRAC
oligopoly
P2

Q
Output

Lower average costs in oligopoly compared to perfect competition due

to greater economies of scale
 Costs and
Revenue

LRAC
P1
MC AR
Q Q1 Output
MR

Natural monopoly; profit-maximising output is Q; if marginal cost

pricing output is Q1 which achieves allocative efficiency but cause firm
to run at a loss
 Costs and
Revenue
MC

AC

P1
P2
P3
P4

AR

Output
MR

Possible pricing options for a firm in monopolistic competition in the

long run
ECONOMICS
DIAGRAMS
AD AND AS DIAGRAMS
 General
price
level

AD3
AD1
AD2
Y2 Y1 Y3 Real GDP

Decrease and increase in aggregate demand

 Price
level

SRAS

Real National
Output

Short run aggregate supply – a change in the price level causes a

movement along from W to X
 General
price
level
SRAS

P1

AD1
AD

Y Y1 Real GDP

Increase in aggregate demand (AD), and the impact on macro

equilibrium
 General
price SRAS1
level

SRAS
P1
P

AD

Y1 Y Real GDP

Decrease in short run aggregate supply (SRAS), and the impact on

macro equilibrium
 Price SRAS1
level SRAS2

P1

P2

AD1

Y1 Y2 Real national
output

Increase in short run aggregate supply (Classical model), and the

impact on macro equilibrium
 Price SRAS2
level SRAS1

P2

P1

AD1

Y2 Y1 Real national
output

Decrease in short run aggregate supply (Classical model); shows cost-

push inflation
 Price
level
SRAS

P2

P1

AD2

AD1

Y1 Y2 Real national
output

Increase in aggregate demand (Classical model); shows demand-

pull inflation
 Price
level
SRAS

SRAS1

P
P1

AD

Y Y1 Real National
Output

Increase in short run aggregate supply (classical model), showing disinflation

or deflation due to falling costs in economy, eg lower oil prices
 Price LRAS
level
SRAS

P1

AD

Y1 Real National
Output

Long run equilibrium real national output and price level in the
classical model
 Price LRAS1
level

P2

P1
AD2

AD1

0 Y1 Real national
output

Long run effect of an increase in aggregate demand (Classical model)

 Price LRAS
level
SRAS

P2

P1

AD2

AD1

Y1 Yfe Real National

Output

Increase in aggregate demand (Classical model)

 Price LRAS2 LRAS1
level

P1

P2
AD

YF2 YF1 RNO

Decrease in long run aggregate supply (classical model)

 PL LRAS1 LRAS2

P1

P2

AD

Y1 Y2 RNO

Increase in long run aggregate supply (Classical model)

 Price LRAS LRAS1
level

P1

AD

Yfe Yfe1 Real National

Output

Increase in economy's productive potential; increase in long run aggregate supply

(classical model) increasing the full employment level of real national output
 Price LRAS
level

SRAS

AD

Y Real national
output

Negative output gap (Classical model)

 Price
level AS

P1
AD

Y1 Real National
Output

Macroeconomic Equilibrium (Keynesian model) with a large negative

output gap
 PL
AS

PL2

AD2
PL1

AD1

Y1 Y2 Y

Increase in aggregate demand, Keynesian model

 Price
level AS

P2

P1 AD2
P AD1
AD
Y Y1 Y2 Yfe Real national
output

Increases in aggregate demand (Keynesian model), with additional

multiplier effect
 PL
AS

P3

AD3
P2

P1
AD2

AD1
Y1 Y2 Y3 Real GDP

Increase in aggregate demand with multiplier effect (Keynesian model,

leading to demand-pull inflation
 Price
level AS

P2

P1 AD2
AD1

Y1 Y2 Yfe Real national

output
Negative output
gap
Negative output gap between Y1 and Yfe (Keynesian model); increase
in AD to AD2 starts to close the gap
 Price
level AS

P2

P1 AD2
AD1

Y1 Y2 Yfe Real national

output
Negative output
gap
Decrease in aggregate demand (Keynesian model)
 General
price AS
level

P1
P

AD
Y1 Y Real GDP

Impact of decrease in aggregate supply caused by short run factors (no

change in productive capacity of economy)
 General
price AS
level

AD

Yfe Real GDP

Aggregate demand required for economy to operate at full employment

output
 General
price AS AS1
level

P1
P
AD2
AD1
AD
Y Y1 Real GDP

Impact of an increase in capital investment with multiplier effect on

economy (Keynesian model)
General LRAS LRAS1 General
price price AS AS1
level level

P
P
P1
P1
AD
AD
Yfe Yfe1 Real GDP Y Y1 Real GDP

Increase in productive potential of economy (i) in classical model and

(ii) in Keynesian model)
 Price LRPC
AS Inflation
level
%

P2

P1
AD2
SRPC2

AD1 SRPC1

Y1 Y2 Real GDP NRU Unemployment

%

Relationship between AD/AS model and Phillips curve; increase in price level
raises expectation of inflation shifting short run Phillips curve outwards
 Price
level
SRAS2

SRAS1
P2

P1

AD

0 Y2 Y1 Real National
Output

Cost push inflation (Classical model)

 Price
level
SRAS

AD2

AD1
Y1 Y2 Real National
Output

Demand- pull inflation (classical model)

ECONOMICS
DIAGRAMS
FINANCIAL MARKETS DIAGRAMS
 Interest SM
rate

DM

Q Quantity
of money

Money market equilibrium

 Price of
money S
(interest
rate)

P1

D1

Q Q1 Quantity of
money

Alternative money market diagram

 Interest S
rate

i1

D D1

Q Q1 Quantity of
credit / loans

Money market: Increase in demand for money (credit/loans)

 Interest S1
S
rate

r1

Q Q1 Quantity of
money

Money market: Increase in the money supply

 Price of S
bonds

P1

D D1

Q Q1 Quantity of
bonds

Bond market: Increase in the demand for bonds

 Price of
currency S

Q Quantity of
currency

Foreign exchange (FOREX) market equilibrium

 Price of
currency S

S1

E1

Q Q1 Quantity of
currency

Increase in supply in a foreign exchange market

 Exchange
rate i.e. S
price of
currency

P1
Appreciation
P

D1
D

Q Q1 Quantity of
currency

Foreign exchange market: increase in demand for a currency causing

an appreciation
 PL of £
S of £

PL2

PL1

D2 of £

D1 of £

Q1 Q2 Q of £

Foreign exchange market: increase in demand for £s causing a Sterling

appreciation
 Exchange
rate i.e. S
price of Excess supply of
currency currency

Peg

Qd Q Qs Quantity of
currency

Foreign exchange market: Excess supply of currency when price is

above the market equilibrium
 Value of
currency S
e.g. £1 = $

E1

D1
D

Q Q1 Quantity
currency

Foreign exchange market: increase in market demand for a currency

ECONOMICS
DIAGRAMS
GENERAL MACRO DIAGRAMS
 Actual GDP
GDP

Recovery Trend growth

rate
Boom
Recession Slump /
trough

Time

Phases in the economic cycle

 GDP

New
trend

Actual
GDP

Old trend

Time

Impact of an increase in productive potential on trend GDP growth

 Inflation
rate %

SRPC

Unemployment
rate %

Short run Phillips curve (trade-off between inflation and

unemployment)
 Total Tax
Revenue

T1 T* T2 Tax rate %

Laffer curve
 Tax
Revenue

TR1

TR2

TR2(%) TR2 Tax rate %

Laffer curve showing how a reduction in the tax rate could increase
total tax revenue
 Tax
Revenue

T* Rate of
tax %

Laffer curve showing tax rate that creates maximum tax revenue
 Tax
rate %
C

Z X Y
Total Tax
Revenue %
Alternative representation of the Laffer curve
 100
Cumulative
percentage of
income 80
lity
a
60 e qu
lu te
so
f ab r ve
40 o u
in e n zC
L re
Lo
20

0 20 40 60 80 100
Cumulative
percentage of
population

Income inequality: Lorenz curve used to find out Gini coefficient

 100
Cumulative
percentage of
income 80

60
Country A
40

Country B
20

0 20 40 60 80 100
Cumulative
percentage of
household

Income inequality: Lorenz curves used to find out Gini coefficient;

Country A has less income inequality than Country B
 Cumulative %
share of income

a lity
q u
ofe
e
Lin
A Lorenz
curve

Cumulative % households

Income inequality: Gini coefficient is area A/(areas A+B)

 Cumulative %
of income

B
2010

Area
2020

aA
Are

Cumulative %
of population

How two different Lorenz curves (income distributions) can give the
same Gini coefficient
 Gini
coefficient China

UK

GDP per
capita

Kuznets curve
ECONOMICS
DIAGRAMS
TRADE-RELATED DIAGRAMS
 Goods
CHINA

UK

Services

Absolute advantage: production possibilities

 Coffee

500 Economy L

300

Economy K
300 500 Tobacco

Absolute advantage production possibilities

 Financial
Services

UK Germany
Cars

Absolute advantage production possibilities

 Tourism

Spain
Belgium
Bakery
items

Comparative advantage production possibilities

 15
= tax revenue

Price
(£s) = welfare loss

Sdomestic

Sworld + tariff
4

Sworld
2
Ddomestic

4 13 Quantity (‘000s)
Tariff model; tariff imposed on good raises tax revenue but causes a
welfare loss
 Price

Sdomestic

Sworld + tariff
P1

Sworld
P2
Ddomestic

Q3 Q1 Q2 Q4 Quantity
Removal of tariff increase imports from Q1Q2 to Q3Q4
 P

P2
Tariff
P1

Q2 Q1 Q

Tariff set so price rises above domestic market equilibrium means there will
be no imports and the market equilibrium will be determined domestically
 PL

Stariff1
PL1

Stariff2
PL2
D
Q3 Q1 Q2 Q4 Q

Reduction in tariff
 S
Price of
exports S+
subsidy
P

P1
Unit subsidy

Quantity
of exports

Impact of export subsidy on price of exports (vertical distance =

subsidy per unit)