Economics Diagrams For The Ib 2d5x34
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Important diagrams to Chapter 2 Competitive markets: demand and supply
price of chocolate bars ($)
(a) Demand of consumer A
(b) Demand curve of consumer B
(c) Market demand
P ($)
P ($)
5
5
5
4
4
+
3
+
3
2
2 1
DA
1
0
2 4 6 8 10 12 quantity of chocolate bars (per week)
0
demands of other consumers in the market
4
=
3 2 1
DB
0
2 4 6 8 10 12 quantity of chocolate bars (per week)
Dm 2 4 6 8 10 12 14 quantity of chocolate bars (thousands per week)
Figure 2.2 Market demand as the sum of individual demands
(a) A movement along the demand curve, caused by a change in price, is called a ‘change in quantity demanded’
(b) A shift of a demand curve, caused by a change in a determinant of demand, is called a ‘change in demand’
P
P change in demand
P1
A
change in
quantity demanded
decrease in D
B
P2
D2 D
0
increase in D
Q1
Q2
D3 Q
0
D1 Q
Figure 2.4 Movements along and shifts of the demand curve
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(a) Supply of firm A
(b) Supply of firm B
(c) Market supply
price of chocolate bars ($)
Important diagrams to
P$
P$
SA
5 4
4
3
+ 3
2
2
1
1
0
SB
5
+
supplies of other firms in the market
4
= 3 2 1
0
200 400 600 quantity of chocolate bars (per week)
Sm
5
0
200 400 600 quantity of chocolate bars (per week)
2 4 6 8 10 12 quantity of chocolate bars (thousands per week)
Figure 2.6 Market supply as the sum of individual supplies
(a) A movement along the supply curve, caused by a change in price, is called a ‘change in quantity suppied’
P
(b) A shift of the supply curve, caused by a change in a determinant of supply, is called a ‘change in supply’
P
S B
P2
change in quantity supplied
A
P1
0
Q1
Q2
P1
0
Q
S1
S3
Q3
decrease in supply
increase in supply
Q1
Q2
S2
Q
price of chocolate bars ($)
Figure 2.8 Movements along and shifts of the supply curve
S 5
surplus
4 3
equilibrium price
market equilibrium
2 shortage
1
D equilibrium quantity
0
2 4 6 8 10 12 quantity of chocolate bars (thousands per week)
14
Figure 2.9 Market equilibrium
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Important diagrams to (a) Increase in demand P
(b) Decrease in demand
initial equilibrium
c
P2 a
S
P
final equilibrium
P1
b D2
P1
final equilibrium
S a c
P3
D1
D1 0
Q1
initial equilibrium
b
D3
Q2
0
Q
Q3
Q1
Q
Figure 2.10 Changes in demand and the new equilibrium price and quantity
(a) Increase in supply
(b) Decrease in supply
initial equilibrium
final equilibrium
S1
P a
P1
c
P2
P
S2
b
S3
final equilibrium
P1
S1
c
P3
a
b
D 0
Q2
Q1
initial equilibrium
D 0
Q
Q3
Q1
Q
Figure 2.11 Changes in supply and the new equilibrium price and quantity
(a) Adjustment of price to increased demand P
S C
P2 P1
A
B D2 D1
0
Q1
Q3
Figure 2.16 Price as a signal and incentive
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shortage = excess demand
Q2 Q
P1
S = MC
P2 P3 consumer surplus Pe producer surplus P4 P5
Allocative efficiency: at market equilibrium MB = MC and social surplus is maximum
D = MB
P6 0
Qa Qb
Qe
Q
Figure 2.17 Consumer and producer surplus in a competitive market
Economics for the IB Diploma
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Important diagrams to Higher level topic P ($)
P ($)
Qd = 14 – 2P
5
Qd = 19 – 2P
5
4 Qd = 10 – 2P
4
3
3
a decreases
2
a increases
1
2
Qd = 14 – 2P Qd = 14 – 4P absolute value of b increases
1
0
2 4 6 8 10 12 14 16 18 20 quantity of chocolate bars (thousands per week)
Figure 2.12 Shifts of the demand curve (changes in a in the function Qd = a – bP )
P ($) 5
0 2 4 6 8 10 12 14 16 18 20 quantity of chocolate bars (thousands per week)
Figure 2.13 Changing the slope of the demand curve (changes in b in the function Qd = a – bP )
P($) Qs = –1 + 2P
Qs = 2 + 2P Qs = 6 + 2P
5
4
4
3
3
c decreases
c increases
2
2
1
1
0 2 4 6 8 10 12 14 16 18 quantity of chocolate bars (thousands per week)
Figure 2.14 Shifts of the supply curve (changes in c in the supply function Qs = c + dP )
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Qs = 2 + 2P
value of d increases
Qs = 2 + 4P
0 2 4 6 8 10 12 14 16 18 quantity of chocolate bars (thousands per week)
Figure 2.15 Changing the slope of the supply curve (changes in d in the function Qs = c + dP )
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Important diagrams to
Chapter 3 Elasticities Frequently encountered cases
(a) Price inelastic demand: 0 < PED <1
(b) Price elastic demand: 1 < PED < ∞
P
P 5%
P2
P2 P1
10% P1
D
D 0
Q2 Q1
0
Q
5%
P
(d) Perfectly inelastic demand: PED = 0
(e) Pefectly elastic demand: PED = ∞
P
P
D
P1
P2
5%
P1
Q
10%
Special cases
(c) Unit elastic demand: PED = 1
Q2 Q1
D
D
0
Q2
Q1
Q
0
Q1
Q
0
Q
5% Figure 3.1 Demand curves and PED
P ($) 50 45 40 35 30 25 20 15 10 5 0
f
PED = 4 e d
elastic portion of demand curve
PED = 1 c
inelastic portion of demand curve
b PED = 0.25 a
10 20 30 40 50 60 70 80 90 100 units of good A
Figure 3.2 Variability of PED along a straight-line demand curve
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Important diagrams to (a) PED > 1 (elastic demand)
P
(c) PED = 1 (unit elastic demand)
P
P
PED > 1
P2 P1 C
PED > 1
PED = 1 PED < 1
PED = 1 P2 P1
A B 0
(b) PED < 1 (inelastic demand)
D Q2 Q1
0
Q
C A
P2 C
PED < 1 B
P1 A
D
0
Q2 Q1 Q
D
B
Q2
Q1
Q
Figure 3.5 PED and total revenue
(a) Primary commodities: supply shifts with inelastic demand
(b) Manufactured products: supply shifts with elastic demand
S2
S2 S1
P P2
S3
P1
P3
P3 D
D Q2 Q1 Q3
S3
P2
P1
0
S1
P
0
Q
Q2
Q1
Q3
Q
Figure 3.6 Price fluctuations are larger for primary commodities because of low PED
(a) Inelastic demand
P
(b) Elastic demand
final equilibrium
Pt
P
S2 tax per unit
S1
initial equilibrium
P1
final equilibrium
Pt P1
Qt
Q
tax per unit
S1
initial equilibrium
D
D 0
S2
0
Qt
Q
Figure 3.7 PED, indirect taxes and government tax revenue
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Important diagrams to (a) Substitutes and positive XED : demand for Pepsi®
P
P
S YED < 0 0 < YED < 1 YED > 1 inferior good
D2 D3 D1
D increases as price of Coca-Cola® increases
0
D2
0
D decreases as price of Coca-Cola® decreases
income inelastic demand, normal good
D1
income elastic demand, normal good
D3
D4 Q
Q Figure 3.9 Demand curve shifts in response to increases in income for different YEDs
(b) Complements and XED : demand for tennis balls
P
S
D2 D1 D3 D decreases as price of tennis rackets increases 0
D increases as price of tennis rackets decreases
Q
Figure 3.8 Cross-price elasticities Frequently encountered cases
(a) Price inelastic supply: PES < 1
(b) Price elastic supply: PES > 1
P
P S S
P2 10%
P2 10%
P1
0
Q1 Q2
P1
0
Q
5%
Q2
Q
15%
Special cases
(c) Unit elastic supply: PES = 1
(d) Perfectly inelastic supply: PES = 0
P
P
S1
Q1
(e) Perfectly elastic supply: PES = ∞
P
S
S2 S3 0
P1
Q
0
Q1
Q
0
S
Q
Figure 3.11 Supply curves and PES
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Important diagrams to (a) Primary commodities: demand shifts with inelastic supply
S
P P2 P1 P3
0
D3
D1
(b) Manufactured products: demand shifts with elastic supply
P S
P2 P1 P3
D2 Q
0
D2 D3
D1 Q
Figure 3.13 Price fluctuations are larger for primary commodities because of low PES
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Important diagrams to
Chapter 4 Government intervention (a) Market outcomes: specific tax
(a) Specific tax P
S2 (= S1 + tax) tax per S 1 unit
P
government revenue
Pc
S2 (= S1 + tax) tax per unit S1
P* Pp
0
0
Q
(b) Ad valorem tax
Q t Q*
D Q
(b) Market outcomes: ad valorem tax S2 (= S1 + tax)
P
tax per unit
P
government revenue
tax per unit S
S1 Pc
tax per unit
S2 = S1 + tax
1
P* PP
0
Q
Figure 4.1 Supply curve shifts due to indirect (excise) taxes
0
D Qt Q*
Q
Figure 4.2 Impacts of specific and ad valorem taxes on market outcomes
S1
P Pp P*
subsidy per unit
S2 = S1 – subsidy
Pc
D 0
Q*
Qsb
Q
Figure 4.8 Impacts of subsidies on market outcomes
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Important diagrams to P
P
S
Pe
welfare loss
a Pe
Pc shortage = excess demand
0
Qs
Qe
Pc
D
Qd
Q
0
Figure 4.12 Price ceiling (maximum price) and market outcomes
P
excess supply = surplus
S
Pf
S = MC
b d
c e
D = MB Qs
Qe
Qd
Q
Figure 4.13 Welfare impacts of a price ceiling (maximum price)
P
excess supply = surplus
S
Pf
Pe
D+ government purchases
Pe D
0
Qd
Qe
Q
Qs
Figure 4.15 Price floor (minimum price) and market outcomes
D 0
Qd
Qe
Qs
Q
Figure 4.16 An agricultural product market with price floor and government purchases of the surplus
excess supply = surplus
P
S = MC
a Pf b
c e
Pe d
f D+ government purchases
welfare loss
D = MB 0
Qd
Qe
Qs
Q
Figure 4.17 Welfare impacts of a price floor (minimum price) for agricultural products and government purchases of the surplus
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price of labour (wage)
Important diagrams to P
excess supply of labour = labour surplus = unemployment
supply of labour
Wm Wm
We
We
Qd Qe Qs quantity of labour
S
welfare loss
b
c e
d
demand for labour
0
a
D
Q 0
Figure 4.19 Labour market with minimum wage (price floor)
Qd
Qe
Qs
Q
Figure 4.20 Welfare impacts of a minimum wage
Higher level topics
(a) Inelastic supply
(a) Inelastic demand
P
P
tax per unit
S1
Pc P*
consumers producers
Pp D
0
Qt Q*
Q
P
S2 = S1 + tax tax per unit
Pp 0
consumers producers
0
Qt Q*
Q
P
S2 = S1 + tax
S1 Pc
consumers
P* Pp
producers
tax per unit
consumers
Q*
Q
Figure 4.6 Incidence of an indirect tax with inelastic and elastic demand
© Cambridge University Press 2012
0
S1
producers
D Qt
D
(b) Elastic supply
(b) Elastic demand
Pc P*
S1
tax per unit
Pc P* Pp
S2 = S1 + tax
S2 = S1 + tax
Qt
Q*
D Q
Figure 4.7 Incidence of an indirect tax with inelastic and elastic supply
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Important diagrams to P
P
S1 = MC
tax per unit
consumer surplus after the tax
S = MC Pc
consumer surplus
P*
S2 = S1 + tax
P*
government revenue from the tax
a
welfare loss = a + b
b
Pp
producer surplus
producer surplus after the tax
D = MB
D = MB 0
Q*
0
Q
(a) Consumer and producer surplus in a competitive free market: maximum social surplus
Q*
Qt
Q
(b) Consumer and producer surplus with an indirect (excise) tax: welfare loss
Figure 4.4 Effects of indirect taxes on consumer and producer surplus
(a) Consumer and producer surplus in a competitive free market: maximum social surplus
(b) Consumer and producer surplus with a subsidy: welfare loss P
P S1 = MC S = MC
P*
subsidy per unit S2 = S1 – subsidy
Pp
gain in producer P * surplus gain in consumer surplus Pc
consumer surplus producer surplus
a
welfare loss
D = MB 0
Q*
D = MB
Q 0
Q*
Qsb
Q
Figure 4.10 Effects of subsidies on consumer and producer surplus
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Important diagrams to
Chapter 5 Market failure P S = MPC = MSC Popt D = MPB = MSB 0
Qopt allocative efficiency is achieved
Q
Figure 5.1 Demand, supply and allocative efficiency with no externalities
(a) Welfare loss
MSC
P
external cost
S = MPC
Popt
external cost S = MPC
Popt Pm
Pm
0
MSC
P
D = MPB = MSB Q
Qopt Qm
Figure 5.2 Negative production externality
welfare loss D = MPB = MSB
0
Qopt Qm
Q
Figure 5.3 Welfare loss (deadweight loss) in a negative production externality
MSC
P
S = MPC
Popt Pm
0
Qopt Qm
D = MPB = MSB Q
Figure 5.4 Government regulations to correct negative production externalities
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Important diagrams to (b) Effects on external costs of a tax on emissions (carbon tax)
(a) Imposing an indirect tax on output or on pollutants MSC = MPC + tax tax = external cost
P Pc = Popt
(c) Tradable permits
P2
S = MPC
S = MPC Pm
Pm
P1
Pp
Qopt Qm
0
Q
D2 D1
D = MPB = MSC
D = MPB = MSB 0
S of tradable permits
P
MSC1 = MPC + tax MSC2
P
Qopt1 Qopt2 Qm
Q
0
Q1
Q
Figure 5.5 Market-based policies to correct negative production externalities
(a) Welfare loss
P S = MPC = MSC
P
Pm D = MPB
Popt
external cost
welfare loss
Pm Popt
external cost
D = MPB
MSB 0
Qopt
Qm
Q
0
MSB Q
Qopt Qm
Figure 5.7 Welfare loss (deadweight loss) in a negative consumption externality
Figure 5.6 Negative consumption externality
(a) Government regulations and advertising P
(b) Market-based: imposing an indirect tax P
external cost
S = MPC = MSC
MPC + tax tax = external cost
Pc
S = MPC = MSC
Pm
Pm D1 = MPB
Popt
Pp
D = MPB
D2 = MSB after demand decreases
0
Qopt
Qm
S = MPC = MSC
Q
MSB 0
Qopt
Qm
Q
Figure 5.8 Correcting negative consumption externalities
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Important diagrams to (a) Welfare loss
S = MPC
P
external benefits
Pm
P S = MPC
MSC
external benefits MSC
Pm
Popt
Popt
0
Qm Qopt
D = MPB = MSB Q
D = MPB = MSB 0
Figure 5.9 Positive production externality
Q
(b) Granting a subsidy
S = MPC
P
Qm Qopt
Figure 5.10 Welfare loss (deadweight loss) in a positive production externality
(a) Direct government provision
P
S = MPC
spillover benefit
MSC
subsidy = spillover benefit
Pm
Pm
Popt
Popt
0
welfare loss
Qm Qopt
D = MPB Q
0
MSC
Qm Qopt
D = MPB Q
Figure 5.11 Correcting positive production externalities
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Important diagrams to P
P
S = MPC = MSC Popt Pm
MSB
welfare loss
S = MPC = MSC
external benefit
0
Qm Qopt
D = MPB Q
Popt Pm
external benefits
0
MSB D = MPB Q
Figure 5.12 Positive consumption externality
(a) Legislation or advertising
Qm Qopt
Figure 5.13 Welfare loss (deadweight loss) in a positive consumption externality
P S = MPC = MSC Popt D2 = MSB
Pm
external benefit
D1 = MPB 0
Qm Qopt
Q
(b) Direct government provision P
S = MPC = MSC S + government provision
Pm MSB
Pc D = MPB 0
Qm
Qopt
Q
(c) Granting a subsidy P
S = MPC = MSC subsidy = external benefit
MPC – subsidy
Pm MSB
Pc D = MPB 0
Qm
Qopt
Q
Figure 5.14 Correcting positive consumption externalities
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Important diagrams to
Chapter 6 The theory of the firm I: Production, costs, revenues and profit Higher level topics
units of output
(c) Total product curve
(c) Total cost, total variable cost and total fixed cost curves
TP
TC 0
units of output
TVC
costs
units of variable input (labour)
TFC 0
output, Q
AP 0
MC
MP units of variable input (labour)
(d) Marginal and average product curves
ATC
units of output (AP, MP)
costs
Figure 6.1 Total, marginal and average products
AVC
AFC
AP 0
0
MP units of variable input (labour)
output, Q
(d) Average cost and marginal cost curves Figure 6.2 Total, average and marginal cost curves
costs (AVC, MC)
MC AVC
0
output, Q
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Figure 6.3 Product curves and cost curves are mirror images due to the law of diminishing returns
Economics for the IB Diploma
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Important diagrams to (c) Economies and diseconomies of scale
(b) Long-run average total cost curve in relation to short-run average total cost curves
SRATC1 SRATC2
SRATCm
0 0
Q1 Q2
diseconomies of scale
costs
b
economies of scale
LRATC
costs
a
LRATC
output, Q
output, Q
Figure 6.5 The long-run average total cost curve
(b) Profit-maximising firm produces at Q2 and makes zero economic profit: TR – TC = 0 (it earns normal profit)
a b
e
c
f d
Q1 Q2 Q3
0
costs, revenues
costs, revenues
TC TR
0
Q
(c) The loss-minimising firm produces at Q2 (if it produces) and makes a loss = TC – TR = a – b (negative economic profit since TR < TC )
TC
TC
costs, revenues
(a) Profit-maximising firm produces at Q2 and makes economic profit: TR – TC = c – d
TR a
Q1 Q2 Q3 Q
a
TR b
Q1
0
Q2 Q3
Q
Figure 6.10 Profit maximisation using the total revenue and total cost approach when the firm has no control over price
(b) Loss minimisation
(a) Profit maximisation
TC, TR
TC
TC, TR
TC b TR a
TR 0
Q
max
Q
0
Q1min
Q
Figure 6.11 Profit maximisation using the total revenue and total cost approach when the firm has control over price
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Important diagrams to
Chapter 7 The theory of the firm II: Market structures Higher level topic
P
P S
Pe
Pe
D
D 0
0
Q
(a) Individual firm Figure 7.1
Q
(b) Market/industry
Market (industry) demand and supply determine demand faced by the perfectly competitive firm
P, MR, AR TR 40
TR 70 60 50 40 30 20 10 0
30 20 10 1 2 3 4 5 6 7 Q
D = P = MR = AR
0
1 2 3 4 5 6 7 Q
(b) Marginal and average revenue
(a) Total revenue Figure 7.2 Revenue curves under perfect competition
ATC
price, revenue, costs
P = minimum ATC = break-even price firm makes normal profit, or zero economic profit P = minimum AVC = shut-down price firm is indifferent between producing at a loss or not producing
P > ATC firm makes economic (supernormal) profit ATC > P > AVC firm makes loss but continues to produce P < AVC firm makes loss and shuts down
MC 1
P1 2
P2 3
P3 P4 P5 0
AVC
4 5 Q5 Q4 Q3 Q2 Q1 output, Q
Figure 7.4 Summary of the perfectly competitive firm’s short-run decisions, and the firm’s short-run supply curve
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Important diagrams to
MC P1
ATC AVC
a
total profit
P1 = MR1 = AR1 = D1
b
profit
Q
Q1
Q
MC
ATC
P2
P2 = MR2 = AR2 = D2 = break-even price (break-even point) Q
Q2
0
AVC
(c) Economic loss: the firm continues to produce
(d) Loss in the short run and the shut-down price price, revenue, costs
0
price, revenue, costs
(b) Zero economic profit (normal profit)
price, revenue, costs
price, revenue, costs
(a) Economic profit
MC
ATC
c total loss
P3
P3 = MR3 = AR3 = D3
d
loss Q
Q3
0
AVC
Q
MC
ATC
AVC
e total loss
P4
f
loss = AFC Q
Q4
0
P4 = MR4 = AR4 = D4 = short-run shut-down price Q
price, revenue, costs
(e) The loss-making firm that will not produce MC
ATC
g P5
P5 = MR5 = AR5 = D5
h
Q5
0
AVC
Q
Figure 7.3 Short-run equilibrium positions of the perfectly competitive firm
(a) The firm
(b) The industry
price, costs, revenue
P MC SRATC
D = MR
Pe
S
LRATC Pe
D 0
Qf
Q
0
Qi
Q
Figure 7.5 The firm and industry long-run equilibrium position in perfect competition
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Important diagrams to From economic (supernormal) profit to normal profit
(a) The firm
(b) The industry
costs, revenue, P
P MC a
P1
1
P1
b
P2
S1
ATC
S2 2
P2
D 0
Q2 Q1
0
Q
Q2
Q1
Q
From loss to normal profit
costs, revenue, P
(c) The firm
(d) The industry P
ATC
MC
S2
a P1 P2
P2
2
P1
b
S1 1 D
0
Q1 Q2
0
Q
Q2
Q1
Q
Figure 7.6 From short-run equilibrium to long-run equilibrium
P costs, revenue, P
MC
S = MC ATC
Pe
0
consumer surplus
P = MR = Pe
Qe
(a) The firm
Q
Pe
producer surplus
0
Qe
D = MB Q
(b) The market/industry
Figure 7.7 Productive and allocative efficiency in perfect competition in the long run
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Important diagrams to (a) price, costs, revenue
40 35 30 25 20 15 10 5
TR
0
Pe profit
PED = 1 (unit elastic demand)
PED > 1 (price-elastic demand)
15
PED < 1 (price-inelastic demand)
10
Q
1 2 3 4 5 6 7 8 9 10 11
D = AR Q
Q
max
MC Pe loss
0
P = AR = D
b
MR
5 0
ATC
(b)
Q
1 2 3 4 5 6 7 8 9 10 11
(b) Marginal and average revenue
price, revenue ( )
MC a
0
price, costs, revenue
total revenue ( )
(a) Total revenue
ATC
c d
MR Qlmin
D = AR Q
Figure 7.11 Profit maximisation and loss minimisation in monopoly: marginal revenue and cost approach
-5 MR
MC Pπ
costs
price, costs, revenue
Figure 7.10 Revenue curves in monopoly
Pr
LRATC D
D = AR 0
Qπ
Qr
MR
minimum efficient scale
Q
Figure 7.12 Comparison of profit maximisation and revenue maximisation by the monopolist
© Cambridge University Press 2012
0
Q
Figure 7.13 Natural monopoly
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Important diagrams to (a) Industry in perfect competition
(b) Monopoly MC
a
Ppc
P = MRpc
D = MB 0
Qpc
price, costs, revenue
price, costs, revenue
S = MC b
Pm
a
Ppc
D = MB 0
Q
Qm
Q
Qpc MRm
Figure 7.14 Higher price, lower output by the firm in monopoly
(a) Perfect competition P
Ppc
(b) Monopoly consumer surplus
P
S = MC A consumer surplus
Pm
producer surplus B
C
D
Qpc
E F
welfare (deadweight) loss
producer surplus
D = MB 0
MC
0
Q
Qm
D = MB
Qpc MRm
Q
Figure 7.15 Consumer and producer surplus and welfare (deadweight) loss in monopoly compared with perfect competition
(b) Monopoly
price, costs, revenue
price, costs
(a) Perfectly competitive firm
MC ATC Pe
0
Qpe
Q
at long-run equilibrium production takes place at min ATC (productive efficiency), and Pe = MC (allocative efficiency)
MC ATC Pe
D 0
Qm
Q MR at long-run equilibrium production takes place at greater than min ATC (productive inefficiency), and Pe > MC (allocative inefficiency)
Figure 7.16 Allocative and productive inefficiency in perfect competition and monopoly
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23
Important diagrams to
economic (supernormal) profit MC Pe
ATC
D = AR 0
Qe
MC
ATC
Pe
D = AR 0
Q
(c) Losses
Qe
price, costs, revenue
(b) Normal profit
price, costs, revenue
price, costs, revenue
(a) Economic profit
losses Pe
D = AR 0
Q
Qe
Q
MR
MR
MR
ATC
MC
Figure 7.21 Short-run equilibrium positions of the firm in monopolistic competition
Intergalactic Space Travel’s price High price Low price 40 million Zs
ATC
Pe
D = AR 0
Qe
Qc MR
Q
Universal Space Line’s price Low price High price
price, costs, revenue
MC 40 million Zs
70 million Zs 10 million Zs
4 10 million Zs
70 million Zs
2 20 million Zs
20 million Zs
3
1
Figure 7.23 Game theory: the prisoner’s dilemma
Figure 7.22 Long-run equilibrium of the firm in monopolistic competition
price, costs, revenue
P MC a
Pe
MC1
ATC
MC2
b
profit
MR 0
Z
P1
Q
max
D
D = AR Q
0
Q1
Q MR
Figure 7.24 Profit maximisation by a price-fixing cartel
© Cambridge University Press 2012
Figure 7.25 The kinked demand curve
Economics for the IB Diploma
24
Important diagrams to P
P
P1
P
P2
Q1
MR1
MR = MR1 + MR2
D2
D1 0
MC
Q
(a) Market 1
0
Q2
(b) Market 2
MR2 Q
0
Q3
Q
(c) Market 1 and market 2
Figure 7.26 Third-degree price discrimination
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25
Important diagrams to
Chapter 8 The level of overall economic activity
u
in (
ho
n tio
households (consumers)
ip rsh eu
uc
land , la bo
ur ,
en pr
land, lab our, eurship cap pren e r t i ta n e resource l, e , l a t nt i markets p re a c o c e sts of com n i p d , l ro es d ho wag rofit) se nt, st, p e r ere t
firms (businesses)
h
ou pe sehol d nd itur e
go o
ds
an ds erv
ices
product markets
es
ex
s nue reve
ds goo
vic er s and
Figure 8.1 Circular flow of income model in a closed economy with no government
factor incomes (wages, rents, interest, profit)
households (consumers)
firms (businesses)
consumer expenditure (spending on goods and services)
di en sp
ng o
tax es ni mp
or t
s
ng
financial markets
t en tm s e i nv
government
ern gov
nt spe di ng ndi ng on e xp orts
savi
me
en sp
other countries
Figure 8.3 Circular flow of income model with leakages and injections
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26
Important diagrams to real GDP actually achieved
real GDP
peak contraction peak
expansion
long term growth trend, or potential GDP trough
trough
0
time (years)
Figure 8.4 The business cycle
actual GDP > potential GDP; there is an output gap: unemployment < natural rate of unemployment expansion: unemployment falls
real GDP
d
contraction: unemployment increases
b a
0
actual GDP
e
actual GDP < potential GDP; there is an output gap: unemployment > natural rate of unemployment
c long term growth trend, or potential GDP = full employment GDP; unemployment = natural rate of unemployment
time (years)
Figure 8.5 Illustrating actual output, potential output and unemployment in the business cycle
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Important diagrams to
Chapter 9 Aggregate demand and aggregate supply (a) The aggregate demand curve
(a) The upward-sloping SRAS curve
price level
price level
SRAS
AD 0
real GDP
(b) Shifts in the aggregate demand curve
(b) Shifts in the SRAS curve
AD1
AD2 0
real GDP
(a) The economy with a deflationary (recessionary) gap
(b) The economy with an inflationary gap
price level
SRAS
Ple
real GDP
Figure 9.2 The short-run aggregate supply curve (SRAS )
Figure 9.1 The aggregate demand (AD) curve
price level
SRAS3 SRAS 1 SRAS 2
price level
price level
AD3 0
real GDP
SRAS
Ple
(c) The economy at the full employment level of output
price level
0
SRAS
Ple
AD AD
0
Ye Yp
0
real GDP
Yp
Ye
real GDP
AD
0
Yp = Ye real GDP
Figure 9.4 Three short-run equilibrium states of the economy
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Important diagrams to (a) Changes in aggregate demand
(b) Changes in short-run aggregate supply SRAS3
Pl2 Pl1 Pl3
AD2 AD3
0
AD1
Y3 Y1 Y2
price level
price level
SRAS
SRAS1
SRAS2
Pl3 Pl1 Pl2 AD
0
Y3 Y1 Y2
real GDP
real GDP
Figure 9.5 Impacts of changes in short-run macroeconomic equilibrium
(a) Changes in aggregate demand
(b) Changes in short-run aggregate supply
LRAS
LRAS SRAS2 SRAS1
Pl3 Pl1 AD3
Pl2 AD2
0
AD1
Pl2
SRAS3
Pl1 Pl3 AD
Yrec Yp Yinfl
recessionary (deflationary) gap
price level
price level
SRAS
real GDP inflationary gap
0
Y2 Yp Y3
recession with inflation ('stagflation')
real GDP
higher real GDP with lower price level
Figure 9.6 Possible causes of the business cycle
LRAS price level
SRAS
AD 0
Yp real GDP
Figure 9.7 The LRAS curve and long-run equilibrium in the monetarist/ new classical model
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29
Important diagrams to (a) Creating and eliminating a deflationary gap
(b) Creating and eliminating an inflationary gap LRAS
LRAS
SRAS1
Pl1
a
Pl2
price level
price level
SRAS1 SRAS2
b c
Pl3
Pl3
c
Pl2 Pl1
b a
AD1 AD2
0
SRAS2
AD1 AD2
0
Yrec Yp
Yp Yinfl real GDP
real GDP Figure 9.8 Returning to long-run full employment equilibrium in the monetarist/new classical model
LRAS Keynesian AS
Pl1
price level
price level
SRAS1 AD1 SRAS2
Pl2
section III
section II
AD2
0
section I
Yp
0
real GDP
(b) Inflationary gap
(c) Full employment equilibrium Keynesian AS
price level
Keynesian AS
price level
price level
Keynesian AS
real GDP
Figure 9.11 The Keynesian aggregate supply curve
Figure 9.9 Changes in long-run equilibrium in the monetarist/new classical AD-AS model
(a) Recessionary (deflationary) gap
Yp Ymax
AD
AD
AD
0
Ye real GDP
Yp
0
Yp Ye real GDP
0
Yp = Ye real GDP
Figure 9.12 Three equilibrium states of the economy in the Keynesian model
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Important diagrams to (a) The monetarist/new classical model
(b) The Keynesian model Keynesian AS
Pl1 Pl2
price level
price level
LRAS
AD3
Pl3
AD2 AD1
0
Yp
AD2
AD1
0
real GDP
Y1
Y2
AD3
AD4
Y3 Yp real GDP
Figure 9.13 Effects of increases in aggregate demand on real GDP and the price level
(a) The monetarist/new classical model LRAS2
AS1
0
AS2
price level
price level
LRAS1
(b) The Keynesian model
0
Yp2 real GDP
Yp1
Yp2 real GDP
Yp1
Figure 9.14 Increasing potential output, shifts in aggregate supply curves and long-term economic growth
(a) The monetarist/new classical model
AS1
LRAS2 SRAS1
SRAS2
Pl1
0
AD1 Y1
AD2 Y2
real GDP
AS2
price level
price level
LRAS1
(b) The Keynesian model
AD2
AD1
0
Y1
Y2
real GDP
Figure 9.15 Long-term economic growth: achieving potential (full employment) output in a growing economy
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31
Important diagrams to Higher level topic
Keynesian AS induced spending
$8 million
Pl3 price level
price level
autonomous spending
$24 million $32 million
0
AD1
Y1
AD2
Y2
AD3
Y3
real GDP Figure 9.17 Aggregate demand, real GDP and the multiplier in the Keynesian model
© Cambridge University Press 2012
Pl2 Pl1 AD1
0
Y1
AD2
Y2 real GDP
AD3
AD4
Y3
Figure 9.18 How the effect of the multiplier changes depending on the price level
Economics for the IB Diploma
32
Important diagrams to
Chapter 10 Macroeconomic objectives I: Low unemployment, low and stable rate of inflation P
S2 S1
S price
P1 P2
price
P
P2 P1
D1
D
D2 0
Q2
Q1
0
Q
(a) Fall in demand for a product produced in a declining industry, or produced in a local industry that relocates, causes a fall in Q produced; employers fire workers with inappropriate skills or local workers no longer needed due to relocation
Q2
Q1
price of labour (wage)
P
Wm We
Q
(b) Labour market rigidities lead to an increase in costs of production (supply shifts to the left), causing a fall in Q produced; employers hire fewer workers
labour surplus = unemployment
supply of labour
0
Qe Qs Qd quantity of labour
demand for labour Q
(c) Minimum wage legislation and labour union activities lead to higher than equilibrium wages and lower quantity of labour demanded
Figure 10.1 Structural unemployment (b) The Keynesian model
(a) The monetarist/new classical model
Keynesian AS SRAS
price level
price level
LRAS
Pl1 Pl2 AD1
Pl1 Pl2 AD1 AD2
AD2
0
0
Yrec Yp
Yrec
Yp
real GDP
real GDP Figure 10.2 Cyclical unemployment (a) The monetarist/new classical model
(b) The Keynesian model
LRAS
AS
LRAS
Pl1
0
AD2
Pl2 Pl1
AD2
Yinfl
real GDP Figure 10.4 Demand-pull inflation
© Cambridge University Press 2012
SRAS1
Pl2 Pl1
AD1
AD1
Yp
price level
Pl2
price level
price level
SRAS
SRAS2
AD1 0
Yp Yinfl real GDP
0
Yrec
Yp
real GDP Figure 10.5 Cost-push inflation
Economics for the IB Diploma
33
Important diagrams to Higher level topic
(b) The reasoning behind SRAS shifts in of the AD-AS model
(a) The shifting Phillips curve
price level
rate of inflation
SRAS3 c b a
PC3 PC2 PC1 unemployment rate
0
Pl3
SRAS2
c
Pl2
SRAS1
b a
Pl1
AD 0
Y3 Y2 Y1 real GDP
Figure 10.7 Stagflation: outward shifts of the short-run Phillips curve due to decreasing SRAS
(a) The shape of the LRPC and SRPC
(b) The reasoning behind the two curves in of the AD-AS model LRAS SRAS2
9% 7% 5% 0
c b
SRPC2
a
SRPC1
3% 5% unemployment rate
price level
rate of inflation
LRPC
Pl3
c b SRAS1
Pl2 Pl1
AD2
a
AD1
0
Yp Yinfl real GDP
5% = natural rate of unemployment
Figure 10.8 The short-run and long-run Phillips curves
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34
Important diagrams to
Chapter 11 Macroeconomic objectives II: Economic growth and equity in the distribution of income 100
Y
B A 0
X
(b) Economic growth as an increase in production possibilities caused by increases in resource quantities or improvements in resource quality
cumulative percentage of income
(a) Economic growth as an increase in actual output caused by reductions in unemployment and productive inefficiency
80
60
d
Belarus f
20 e a 0
B
h
g
40
Y
C
perfect income equality
b
c Bolivia
40 80 20 60 cumulative percentage of population
100
Figure 11.3 Lorenz curves: Belarus achieves greater income equality than Bolivia
A
100 PPC1 PPC2 PPC3 X
Figure 11.1 Using the production possibilities model to illustrate economic growth
cumulative percentage of income
0
80
60
perfect income equality increased income equality after redistribution
40
20
0
before redistribution
40 80 20 60 cumulative percentage of population
100
Figure 11.4 Lorenz curves and income redistribution
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35
Important diagrams to
Chapter 12 Demand-side and supply-side policies (a) The monetarist/new classical model
(a) The monetarist/new classical model
LRAS
price level
price level
LRAS SRAS
Pl2 Pl1 AD2
SRAS
Pl1 Pl2
AD1 AD2
AD1
0
Yrec Yp
0
real GDP
Yp Yinfl real GDP potential output
(b) The Keynesian model (b) The Keynesian model
AS
Pl2 Pl1
price level
price level
Keynesian AS
Pl1 Pl2
AD1 AD2
AD2 AD1
Yrec
Figure 12.1 Effects of expansionary policy: eliminating a recessionary (deflationary) gap
price level
(a)
potential output
Figure 12.2 Effects of contractionary policy: eliminating an inflationary gap
(b)
Partial crowding out
due to G
SRAS
due to I
AD2
Complete crowding out
Y2
AD2
AD1
AD1
Y1 Y3 real GDP
SRAS due to G
due to I
AD3
0
Yp Yinfl real GDP
Yp real GDP
price level
0
0
0
Y1 Y2 real GDP
Figure 12.3 Crowding out of private investment
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Important diagrams to (a) Equilibrium rate of interest
(b) Changes in the supply of money cause changes in the equilibrium rate of interest Sm3 rate of interest
rate of interest
Sm
i Dm 0
Qe quantity of money
Sm1
Sm2
i3 i1 i2 0
Dm Q3 Q1 Q2 quantity of money
Figure 12.4 The money market and determination of the rate of interest
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37
Important diagrams to
(a) Country A: absolute advantage in good Y; Country B: absolute advantage in good X
(b) Country A: comparative advantage in good Y; Country B: comparative advantage in good X
good Y
Chapter 13 International trade
0
good Y
good Y
0 country A country B
0
good X
country A’s PPC country B’s PPC good X
country A country B
Figure 13.5 Identical opportunity costs: no gains from trade
good X
Figure 13.3 Absolute and comparative advantage Opportunity cost of cotton
Opportunity cost of microchips
(2) Microchips
(3)
(4)
Production possibilities when each country produces only cotton or only microchips (1) Cotton Cottonia Microchippia
20
or
10
10 units of microchips 1 = 20 units of cotton 2
20 units of cotton =2 10 units of microchips
25
or
50
50 units of microchips =2 25 units of cotton
25 units of cotton 1 = 50 units of microchips 2
Table 13.2 Comparative advantage (a) Cottonia exports 10 units of cotton and imports 10 units of microchips 25
25
cotton
20 Microchippia’s PPC
15
0
15 B consumption
10 5
10 5
cotton
20 A production
Cottonia’s PPC
10 20 30 40 50 60 microchips
0
10 20 30 40 50 microchips
(b) Microchippia exports 10 units of microchips and imports 10 units of cotton 25 20 cotton
Figure 13.2 Comparative advantage
15 10 5 0
D consumption C production 10 20 30 40 50 microchips
Figure 13.4 The gains from specialisation and trade based on comparative advantage: both countries consume outside their PPC
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Important diagrams to (a) Effects on imports
Sd =
P
domestic supply
Pd Pw + t
government revenue world price + tariff
Pw
world price = world supply curve
0
tariff
Q1
Q3
Q2
Q4
Dd = domestic demand
Q
Dd = domestic demand
0
Q1
Q3
Q2
imports without quota
domestic supply
b e
a d
Q
tariff
f
world price = world supply curve
Q2
Q3
Q4
Sd = domestic supply
P a
world price + tariff
Dd = domestic demand
Q1
Q4
(b) Welfare effects
Sd =
welfare loss = d + f
0
world price = world supply curve
Pw
imports without tariff
c
plus quota
Pq
imports with quota
P
Pw g
Sdq = domestic supply
quota
quota revenue
imports with tariff
(b) Welfare effects
Pw + t
Sd = domestic supply
P
(a) Effects on imports
Pq Pw g
b c
Sdq = domestic supply plus quota
quota
d e
welfare loss = d + e + f
e f
world price = world supply curve
Q
imports with tariff
Dd = domestic demand
0
imports without tariff
Q1
Q2
Q3
Q4
Q
imports with quota imports without quota
Figure 13.9 Effects of a quota
Figure 13.7 Effects of a tariff
(a) Production subsidy: quantity of imports falls
Sd = domestic supply Sds = domestic
P
subsidy
Ps
supply minus subsidy world price = world supply curve
Pw
Dd = domestic demand 0
Q1
Q3
Q2
Q
imports after subsidy imports before subsidy
Figure 13.11 Production subsidies
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39
Important diagrams to
Chapter 14 Exchange rates and the balance of payments (a) Demand for $ increases: $ appreciates
per $ = price of $ in of
per $ = price of $ in of
(a) The market for US dollars S of $
excess supply of $
(dollars)
0.80
equilibrium exchange rate
0.67 0.50
excess demand for $
D for $ (dollars)
0
Q of $ (dollars)
2.00 equilibrium exchange rate
1.50 1.25
D for
excess demand for
(euros)
Q of (euros)
$ per bople = price of boples in of $
(a) Shifting the currency demand curve
2. central bank buys excess boples, increasing demand for boples
A
1. fall in demand for Bopland's exports reduces demand for boples
C D2 for boples
0
D2 for $
D1 for $ 0
Q of $ (dollars)
S1 of S2 of
D
1.50
F
1.11
E
D for 0
Q of (euros)
Figure 14.2 Exchange rate changes in a freely floating exchange rate system
(b) Shifting the currency supply curve
S of boples
B
B
A
0.67
$ per = price of in of $
(euros)
Q of boples
D1 for boples
$ per bople = price of boples in of $
$ per = price of in of $
S of
excess supply of
Figure 14.1 Exchange rate determination in a freely floating exchange rate system
2.00 1.50
C
0.90
(b) Supply of € increases: € depreciates
(b) The market for euros
0
S of $
S1 of boples
S2
2.00
B
2. imports are reduced, therefore the supply of boples falls
A
1. fall in demand for Bopland's exports reduces demand for bople
D2 for boples 0
D1 for boples
Q of boples
Figure 14.3 Fixed exchange rates: maintaining the value of the bople at 1 bople = $2.00
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Important diagrams to (a) With a trade deficit, country consumes outside its PPC
good A
C
0
PPC
good B
good A
(b) With a trade surplus, country consumes inside its PPC
D PPC
0
good B
Figure 14.6 Using a PPC to illustrate a trade deficit and a trade surplus
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Important diagrams to
Chapter 15 Economic integration and the of trade Higher level topic
global price of internationally traded good
S global supply of wheat
P2 P1
D2 global demand D1 for wheat
P3 D3 0
Q3
Q1
Q2
quantity of internationally traded good
global price of internationally traded good
(b) Changes in global supply: effects of of trade changes on the balance of trade depend on PEDs for exports and imports
(a) Changes in global demand: of trade and balance of trade change in same direction
S3
S1 global supply
P3
S2
P1 P2
global demand D
0
Q3 Q1
Q2
quantity of internationally traded good
Figure 15.1 Changes in global demand or supply: of trade impacts on the balance of trade
P
S1
S2
P1 P2 D2 D1 0
Q
Figure 15.2 Long-term declines in primary product prices due to low growth in demand (due to low YEDs) and high growth in supply (due to technological advances)
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Important diagrams to
Chapter 16 Understanding economic development
industrial goods
A→B: no economic growth with some development B→C: economic growth with no development B→D or E: economic growth with development
0
C D
A B PPC1
E PPC2
merit goods
Figure 16.1 Economic growth and economic development
low income
low savings
low investment
low physical capital
low growth in income
low human capital
low natural capital
low productivity of labour and land
Figure 16.2 The poverty cycle (poverty trap)
© Cambridge University Press 2012
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World Bank country classification The World Bank classifies countries into four groups according to income levels (based on 2008 GNI per capita): • Economically less developed countries: ο low income, with GNI per capita of US$975 or less ο lower middle income, with GNI per capita of $976–$3855 ο upper middle income, with GNI per capita of $3856–$11 905. • Economically more developed countries: ο high income, with GNI per capita of $11 906 or more. Table 16 World Bank country groups by 2008 GNI per capita
Low income economies Afghanistan Bangladesh Benin Burkina Faso Burundi Cambodia Central African Rep. Chad Comoros Congo, Dem. Rep. Eritrea
Lower middle income economies Albania
Guatemala
Angola
Guyana
Armenia
Honduras
Vietnam
Bhutan Bolivia Cameroon
India Indonesia Iran, Islamic Rep.
Nicaragua Nigeria Pakistan
Niger Rwanda
Yemen, Rep. Zambia
Cape Verde China
Iraq Jordan
Senegal
Zimbabwe
Congo, Rep. Côte d’Ivoire Djibouti
Kazakhstan Kiribati Kosovo
Palau Papua New Guinea Paraguay Philippines Samoa
Ecuador
Lesotho
Egypt, Arab Rep. El Salvador
Macedonia, FYR Maldives
Ethiopia Gambia, The Ghana Guinea Guinea-Bissau Haiti Kenya
Madagascar Malawi Mali Mauritania Mongolia Mozambique Myanmar
Sierra Leone Somalia Tajikistan Tanzania Togo Uganda Uzbekistan
Korea, Dem. Rep. Kyrgyz Rep. Lao PDR
Nepal
Liberia
Marshall Islands Micronesia, Fed. Sts Morocco
Sudan Swaziland Syrian Arab Republic Thailand Timor-Leste Tonga Tunisia Turkmenistan Ukraine Vanuatu West Bank and Gaza
São Tomé and Principe Solomon Islands Sri Lanka (continued over)
© Cambridge University Press 2012
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price of chocolate bars ($)
(a) Demand of consumer A
(b) Demand curve of consumer B
(c) Market demand
P ($)
P ($)
5
5
5
4
4
+
3
+
3
2
2 1
DA
1
0
2 4 6 8 10 12 quantity of chocolate bars (per week)
0
demands of other consumers in the market
4
=
3 2 1
DB
0
2 4 6 8 10 12 quantity of chocolate bars (per week)
Dm 2 4 6 8 10 12 14 quantity of chocolate bars (thousands per week)
Figure 2.2 Market demand as the sum of individual demands
(a) A movement along the demand curve, caused by a change in price, is called a ‘change in quantity demanded’
(b) A shift of a demand curve, caused by a change in a determinant of demand, is called a ‘change in demand’
P
P change in demand
P1
A
change in
quantity demanded
decrease in D
B
P2
D2 D
0
increase in D
Q1
Q2
D3 Q
0
D1 Q
Figure 2.4 Movements along and shifts of the demand curve
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(a) Supply of firm A
(b) Supply of firm B
(c) Market supply
price of chocolate bars ($)
Important diagrams to
P$
P$
SA
5 4
4
3
+ 3
2
2
1
1
0
SB
5
+
supplies of other firms in the market
4
= 3 2 1
0
200 400 600 quantity of chocolate bars (per week)
Sm
5
0
200 400 600 quantity of chocolate bars (per week)
2 4 6 8 10 12 quantity of chocolate bars (thousands per week)
Figure 2.6 Market supply as the sum of individual supplies
(a) A movement along the supply curve, caused by a change in price, is called a ‘change in quantity suppied’
P
(b) A shift of the supply curve, caused by a change in a determinant of supply, is called a ‘change in supply’
P
S B
P2
change in quantity supplied
A
P1
0
Q1
Q2
P1
0
Q
S1
S3
Q3
decrease in supply
increase in supply
Q1
Q2
S2
Q
price of chocolate bars ($)
Figure 2.8 Movements along and shifts of the supply curve
S 5
surplus
4 3
equilibrium price
market equilibrium
2 shortage
1
D equilibrium quantity
0
2 4 6 8 10 12 quantity of chocolate bars (thousands per week)
14
Figure 2.9 Market equilibrium
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2
Important diagrams to (a) Increase in demand P
(b) Decrease in demand
initial equilibrium
c
P2 a
S
P
final equilibrium
P1
b D2
P1
final equilibrium
S a c
P3
D1
D1 0
Q1
initial equilibrium
b
D3
Q2
0
Q
Q3
Q1
Q
Figure 2.10 Changes in demand and the new equilibrium price and quantity
(a) Increase in supply
(b) Decrease in supply
initial equilibrium
final equilibrium
S1
P a
P1
c
P2
P
S2
b
S3
final equilibrium
P1
S1
c
P3
a
b
D 0
Q2
Q1
initial equilibrium
D 0
Q
Q3
Q1
Q
Figure 2.11 Changes in supply and the new equilibrium price and quantity
(a) Adjustment of price to increased demand P
S C
P2 P1
A
B D2 D1
0
Q1
Q3
Figure 2.16 Price as a signal and incentive
© Cambridge University Press 2012
shortage = excess demand
Q2 Q
P1
S = MC
P2 P3 consumer surplus Pe producer surplus P4 P5
Allocative efficiency: at market equilibrium MB = MC and social surplus is maximum
D = MB
P6 0
Qa Qb
Qe
Q
Figure 2.17 Consumer and producer surplus in a competitive market
Economics for the IB Diploma
3
Important diagrams to Higher level topic P ($)
P ($)
Qd = 14 – 2P
5
Qd = 19 – 2P
5
4 Qd = 10 – 2P
4
3
3
a decreases
2
a increases
1
2
Qd = 14 – 2P Qd = 14 – 4P absolute value of b increases
1
0
2 4 6 8 10 12 14 16 18 20 quantity of chocolate bars (thousands per week)
Figure 2.12 Shifts of the demand curve (changes in a in the function Qd = a – bP )
P ($) 5
0 2 4 6 8 10 12 14 16 18 20 quantity of chocolate bars (thousands per week)
Figure 2.13 Changing the slope of the demand curve (changes in b in the function Qd = a – bP )
P($) Qs = –1 + 2P
Qs = 2 + 2P Qs = 6 + 2P
5
4
4
3
3
c decreases
c increases
2
2
1
1
0 2 4 6 8 10 12 14 16 18 quantity of chocolate bars (thousands per week)
Figure 2.14 Shifts of the supply curve (changes in c in the supply function Qs = c + dP )
© Cambridge University Press 2012
Qs = 2 + 2P
value of d increases
Qs = 2 + 4P
0 2 4 6 8 10 12 14 16 18 quantity of chocolate bars (thousands per week)
Figure 2.15 Changing the slope of the supply curve (changes in d in the function Qs = c + dP )
Economics for the IB Diploma
4
Important diagrams to
Chapter 3 Elasticities Frequently encountered cases
(a) Price inelastic demand: 0 < PED <1
(b) Price elastic demand: 1 < PED < ∞
P
P 5%
P2
P2 P1
10% P1
D
D 0
Q2 Q1
0
Q
5%
P
(d) Perfectly inelastic demand: PED = 0
(e) Pefectly elastic demand: PED = ∞
P
P
D
P1
P2
5%
P1
Q
10%
Special cases
(c) Unit elastic demand: PED = 1
Q2 Q1
D
D
0
Q2
Q1
Q
0
Q1
Q
0
Q
5% Figure 3.1 Demand curves and PED
P ($) 50 45 40 35 30 25 20 15 10 5 0
f
PED = 4 e d
elastic portion of demand curve
PED = 1 c
inelastic portion of demand curve
b PED = 0.25 a
10 20 30 40 50 60 70 80 90 100 units of good A
Figure 3.2 Variability of PED along a straight-line demand curve
© Cambridge University Press 2012
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5
Important diagrams to (a) PED > 1 (elastic demand)
P
(c) PED = 1 (unit elastic demand)
P
P
PED > 1
P2 P1 C
PED > 1
PED = 1 PED < 1
PED = 1 P2 P1
A B 0
(b) PED < 1 (inelastic demand)
D Q2 Q1
0
Q
C A
P2 C
PED < 1 B
P1 A
D
0
Q2 Q1 Q
D
B
Q2
Q1
Q
Figure 3.5 PED and total revenue
(a) Primary commodities: supply shifts with inelastic demand
(b) Manufactured products: supply shifts with elastic demand
S2
S2 S1
P P2
S3
P1
P3
P3 D
D Q2 Q1 Q3
S3
P2
P1
0
S1
P
0
Q
Q2
Q1
Q3
Q
Figure 3.6 Price fluctuations are larger for primary commodities because of low PED
(a) Inelastic demand
P
(b) Elastic demand
final equilibrium
Pt
P
S2 tax per unit
S1
initial equilibrium
P1
final equilibrium
Pt P1
Qt
Q
tax per unit
S1
initial equilibrium
D
D 0
S2
0
Qt
Q
Figure 3.7 PED, indirect taxes and government tax revenue
© Cambridge University Press 2012
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6
Important diagrams to (a) Substitutes and positive XED : demand for Pepsi®
P
P
S YED < 0 0 < YED < 1 YED > 1 inferior good
D2 D3 D1
D increases as price of Coca-Cola® increases
0
D2
0
D decreases as price of Coca-Cola® decreases
income inelastic demand, normal good
D1
income elastic demand, normal good
D3
D4 Q
Q Figure 3.9 Demand curve shifts in response to increases in income for different YEDs
(b) Complements and XED : demand for tennis balls
P
S
D2 D1 D3 D decreases as price of tennis rackets increases 0
D increases as price of tennis rackets decreases
Q
Figure 3.8 Cross-price elasticities Frequently encountered cases
(a) Price inelastic supply: PES < 1
(b) Price elastic supply: PES > 1
P
P S S
P2 10%
P2 10%
P1
0
Q1 Q2
P1
0
Q
5%
Q2
Q
15%
Special cases
(c) Unit elastic supply: PES = 1
(d) Perfectly inelastic supply: PES = 0
P
P
S1
Q1
(e) Perfectly elastic supply: PES = ∞
P
S
S2 S3 0
P1
Q
0
Q1
Q
0
S
Q
Figure 3.11 Supply curves and PES
© Cambridge University Press 2012
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7
Important diagrams to (a) Primary commodities: demand shifts with inelastic supply
S
P P2 P1 P3
0
D3
D1
(b) Manufactured products: demand shifts with elastic supply
P S
P2 P1 P3
D2 Q
0
D2 D3
D1 Q
Figure 3.13 Price fluctuations are larger for primary commodities because of low PES
© Cambridge University Press 2012
Economics for the IB Diploma
8
Important diagrams to
Chapter 4 Government intervention (a) Market outcomes: specific tax
(a) Specific tax P
S2 (= S1 + tax) tax per S 1 unit
P
government revenue
Pc
S2 (= S1 + tax) tax per unit S1
P* Pp
0
0
Q
(b) Ad valorem tax
Q t Q*
D Q
(b) Market outcomes: ad valorem tax S2 (= S1 + tax)
P
tax per unit
P
government revenue
tax per unit S
S1 Pc
tax per unit
S2 = S1 + tax
1
P* PP
0
Q
Figure 4.1 Supply curve shifts due to indirect (excise) taxes
0
D Qt Q*
Q
Figure 4.2 Impacts of specific and ad valorem taxes on market outcomes
S1
P Pp P*
subsidy per unit
S2 = S1 – subsidy
Pc
D 0
Q*
Qsb
Q
Figure 4.8 Impacts of subsidies on market outcomes
© Cambridge University Press 2012
Economics for the IB Diploma
9
Important diagrams to P
P
S
Pe
welfare loss
a Pe
Pc shortage = excess demand
0
Qs
Qe
Pc
D
Qd
Q
0
Figure 4.12 Price ceiling (maximum price) and market outcomes
P
excess supply = surplus
S
Pf
S = MC
b d
c e
D = MB Qs
Qe
Qd
Q
Figure 4.13 Welfare impacts of a price ceiling (maximum price)
P
excess supply = surplus
S
Pf
Pe
D+ government purchases
Pe D
0
Qd
Qe
Q
Qs
Figure 4.15 Price floor (minimum price) and market outcomes
D 0
Qd
Qe
Qs
Q
Figure 4.16 An agricultural product market with price floor and government purchases of the surplus
excess supply = surplus
P
S = MC
a Pf b
c e
Pe d
f D+ government purchases
welfare loss
D = MB 0
Qd
Qe
Qs
Q
Figure 4.17 Welfare impacts of a price floor (minimum price) for agricultural products and government purchases of the surplus
© Cambridge University Press 2012
Economics for the IB Diploma
10
price of labour (wage)
Important diagrams to P
excess supply of labour = labour surplus = unemployment
supply of labour
Wm Wm
We
We
Qd Qe Qs quantity of labour
S
welfare loss
b
c e
d
demand for labour
0
a
D
Q 0
Figure 4.19 Labour market with minimum wage (price floor)
Qd
Qe
Qs
Q
Figure 4.20 Welfare impacts of a minimum wage
Higher level topics
(a) Inelastic supply
(a) Inelastic demand
P
P
tax per unit
S1
Pc P*
consumers producers
Pp D
0
Qt Q*
Q
P
S2 = S1 + tax tax per unit
Pp 0
consumers producers
0
Qt Q*
Q
P
S2 = S1 + tax
S1 Pc
consumers
P* Pp
producers
tax per unit
consumers
Q*
Q
Figure 4.6 Incidence of an indirect tax with inelastic and elastic demand
© Cambridge University Press 2012
0
S1
producers
D Qt
D
(b) Elastic supply
(b) Elastic demand
Pc P*
S1
tax per unit
Pc P* Pp
S2 = S1 + tax
S2 = S1 + tax
Qt
Q*
D Q
Figure 4.7 Incidence of an indirect tax with inelastic and elastic supply
Economics for the IB Diploma
11
Important diagrams to P
P
S1 = MC
tax per unit
consumer surplus after the tax
S = MC Pc
consumer surplus
P*
S2 = S1 + tax
P*
government revenue from the tax
a
welfare loss = a + b
b
Pp
producer surplus
producer surplus after the tax
D = MB
D = MB 0
Q*
0
Q
(a) Consumer and producer surplus in a competitive free market: maximum social surplus
Q*
Qt
Q
(b) Consumer and producer surplus with an indirect (excise) tax: welfare loss
Figure 4.4 Effects of indirect taxes on consumer and producer surplus
(a) Consumer and producer surplus in a competitive free market: maximum social surplus
(b) Consumer and producer surplus with a subsidy: welfare loss P
P S1 = MC S = MC
P*
subsidy per unit S2 = S1 – subsidy
Pp
gain in producer P * surplus gain in consumer surplus Pc
consumer surplus producer surplus
a
welfare loss
D = MB 0
Q*
D = MB
Q 0
Q*
Qsb
Q
Figure 4.10 Effects of subsidies on consumer and producer surplus
© Cambridge University Press 2012
Economics for the IB Diploma
12
Important diagrams to
Chapter 5 Market failure P S = MPC = MSC Popt D = MPB = MSB 0
Qopt allocative efficiency is achieved
Q
Figure 5.1 Demand, supply and allocative efficiency with no externalities
(a) Welfare loss
MSC
P
external cost
S = MPC
Popt
external cost S = MPC
Popt Pm
Pm
0
MSC
P
D = MPB = MSB Q
Qopt Qm
Figure 5.2 Negative production externality
welfare loss D = MPB = MSB
0
Qopt Qm
Q
Figure 5.3 Welfare loss (deadweight loss) in a negative production externality
MSC
P
S = MPC
Popt Pm
0
Qopt Qm
D = MPB = MSB Q
Figure 5.4 Government regulations to correct negative production externalities
© Cambridge University Press 2012
Economics for the IB Diploma
13
Important diagrams to (b) Effects on external costs of a tax on emissions (carbon tax)
(a) Imposing an indirect tax on output or on pollutants MSC = MPC + tax tax = external cost
P Pc = Popt
(c) Tradable permits
P2
S = MPC
S = MPC Pm
Pm
P1
Pp
Qopt Qm
0
Q
D2 D1
D = MPB = MSC
D = MPB = MSB 0
S of tradable permits
P
MSC1 = MPC + tax MSC2
P
Qopt1 Qopt2 Qm
Q
0
Q1
Q
Figure 5.5 Market-based policies to correct negative production externalities
(a) Welfare loss
P S = MPC = MSC
P
Pm D = MPB
Popt
external cost
welfare loss
Pm Popt
external cost
D = MPB
MSB 0
Qopt
Qm
Q
0
MSB Q
Qopt Qm
Figure 5.7 Welfare loss (deadweight loss) in a negative consumption externality
Figure 5.6 Negative consumption externality
(a) Government regulations and advertising P
(b) Market-based: imposing an indirect tax P
external cost
S = MPC = MSC
MPC + tax tax = external cost
Pc
S = MPC = MSC
Pm
Pm D1 = MPB
Popt
Pp
D = MPB
D2 = MSB after demand decreases
0
Qopt
Qm
S = MPC = MSC
Q
MSB 0
Qopt
Qm
Q
Figure 5.8 Correcting negative consumption externalities
© Cambridge University Press 2012
Economics for the IB Diploma
14
Important diagrams to (a) Welfare loss
S = MPC
P
external benefits
Pm
P S = MPC
MSC
external benefits MSC
Pm
Popt
Popt
0
Qm Qopt
D = MPB = MSB Q
D = MPB = MSB 0
Figure 5.9 Positive production externality
Q
(b) Granting a subsidy
S = MPC
P
Qm Qopt
Figure 5.10 Welfare loss (deadweight loss) in a positive production externality
(a) Direct government provision
P
S = MPC
spillover benefit
MSC
subsidy = spillover benefit
Pm
Pm
Popt
Popt
0
welfare loss
Qm Qopt
D = MPB Q
0
MSC
Qm Qopt
D = MPB Q
Figure 5.11 Correcting positive production externalities
© Cambridge University Press 2012
Economics for the IB Diploma
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Important diagrams to P
P
S = MPC = MSC Popt Pm
MSB
welfare loss
S = MPC = MSC
external benefit
0
Qm Qopt
D = MPB Q
Popt Pm
external benefits
0
MSB D = MPB Q
Figure 5.12 Positive consumption externality
(a) Legislation or advertising
Qm Qopt
Figure 5.13 Welfare loss (deadweight loss) in a positive consumption externality
P S = MPC = MSC Popt D2 = MSB
Pm
external benefit
D1 = MPB 0
Qm Qopt
Q
(b) Direct government provision P
S = MPC = MSC S + government provision
Pm MSB
Pc D = MPB 0
Qm
Qopt
Q
(c) Granting a subsidy P
S = MPC = MSC subsidy = external benefit
MPC – subsidy
Pm MSB
Pc D = MPB 0
Qm
Qopt
Q
Figure 5.14 Correcting positive consumption externalities
© Cambridge University Press 2012
Economics for the IB Diploma
16
Important diagrams to
Chapter 6 The theory of the firm I: Production, costs, revenues and profit Higher level topics
units of output
(c) Total product curve
(c) Total cost, total variable cost and total fixed cost curves
TP
TC 0
units of output
TVC
costs
units of variable input (labour)
TFC 0
output, Q
AP 0
MC
MP units of variable input (labour)
(d) Marginal and average product curves
ATC
units of output (AP, MP)
costs
Figure 6.1 Total, marginal and average products
AVC
AFC
AP 0
0
MP units of variable input (labour)
output, Q
(d) Average cost and marginal cost curves Figure 6.2 Total, average and marginal cost curves
costs (AVC, MC)
MC AVC
0
output, Q
© Cambridge University Press 2012
Figure 6.3 Product curves and cost curves are mirror images due to the law of diminishing returns
Economics for the IB Diploma
17
Important diagrams to (c) Economies and diseconomies of scale
(b) Long-run average total cost curve in relation to short-run average total cost curves
SRATC1 SRATC2
SRATCm
0 0
Q1 Q2
diseconomies of scale
costs
b
economies of scale
LRATC
costs
a
LRATC
output, Q
output, Q
Figure 6.5 The long-run average total cost curve
(b) Profit-maximising firm produces at Q2 and makes zero economic profit: TR – TC = 0 (it earns normal profit)
a b
e
c
f d
Q1 Q2 Q3
0
costs, revenues
costs, revenues
TC TR
0
Q
(c) The loss-minimising firm produces at Q2 (if it produces) and makes a loss = TC – TR = a – b (negative economic profit since TR < TC )
TC
TC
costs, revenues
(a) Profit-maximising firm produces at Q2 and makes economic profit: TR – TC = c – d
TR a
Q1 Q2 Q3 Q
a
TR b
Q1
0
Q2 Q3
Q
Figure 6.10 Profit maximisation using the total revenue and total cost approach when the firm has no control over price
(b) Loss minimisation
(a) Profit maximisation
TC, TR
TC
TC, TR
TC b TR a
TR 0
Q
max
Q
0
Q1min
Q
Figure 6.11 Profit maximisation using the total revenue and total cost approach when the firm has control over price
© Cambridge University Press 2012
Economics for the IB Diploma
18
Important diagrams to
Chapter 7 The theory of the firm II: Market structures Higher level topic
P
P S
Pe
Pe
D
D 0
0
Q
(a) Individual firm Figure 7.1
Q
(b) Market/industry
Market (industry) demand and supply determine demand faced by the perfectly competitive firm
P, MR, AR TR 40
TR 70 60 50 40 30 20 10 0
30 20 10 1 2 3 4 5 6 7 Q
D = P = MR = AR
0
1 2 3 4 5 6 7 Q
(b) Marginal and average revenue
(a) Total revenue Figure 7.2 Revenue curves under perfect competition
ATC
price, revenue, costs
P = minimum ATC = break-even price firm makes normal profit, or zero economic profit P = minimum AVC = shut-down price firm is indifferent between producing at a loss or not producing
P > ATC firm makes economic (supernormal) profit ATC > P > AVC firm makes loss but continues to produce P < AVC firm makes loss and shuts down
MC 1
P1 2
P2 3
P3 P4 P5 0
AVC
4 5 Q5 Q4 Q3 Q2 Q1 output, Q
Figure 7.4 Summary of the perfectly competitive firm’s short-run decisions, and the firm’s short-run supply curve
© Cambridge University Press 2012
Economics for the IB Diploma
19
Important diagrams to
MC P1
ATC AVC
a
total profit
P1 = MR1 = AR1 = D1
b
profit
Q
Q1
Q
MC
ATC
P2
P2 = MR2 = AR2 = D2 = break-even price (break-even point) Q
Q2
0
AVC
(c) Economic loss: the firm continues to produce
(d) Loss in the short run and the shut-down price price, revenue, costs
0
price, revenue, costs
(b) Zero economic profit (normal profit)
price, revenue, costs
price, revenue, costs
(a) Economic profit
MC
ATC
c total loss
P3
P3 = MR3 = AR3 = D3
d
loss Q
Q3
0
AVC
Q
MC
ATC
AVC
e total loss
P4
f
loss = AFC Q
Q4
0
P4 = MR4 = AR4 = D4 = short-run shut-down price Q
price, revenue, costs
(e) The loss-making firm that will not produce MC
ATC
g P5
P5 = MR5 = AR5 = D5
h
Q5
0
AVC
Q
Figure 7.3 Short-run equilibrium positions of the perfectly competitive firm
(a) The firm
(b) The industry
price, costs, revenue
P MC SRATC
D = MR
Pe
S
LRATC Pe
D 0
Qf
Q
0
Qi
Q
Figure 7.5 The firm and industry long-run equilibrium position in perfect competition
© Cambridge University Press 2012
Economics for the IB Diploma
20
Important diagrams to From economic (supernormal) profit to normal profit
(a) The firm
(b) The industry
costs, revenue, P
P MC a
P1
1
P1
b
P2
S1
ATC
S2 2
P2
D 0
Q2 Q1
0
Q
Q2
Q1
Q
From loss to normal profit
costs, revenue, P
(c) The firm
(d) The industry P
ATC
MC
S2
a P1 P2
P2
2
P1
b
S1 1 D
0
Q1 Q2
0
Q
Q2
Q1
Q
Figure 7.6 From short-run equilibrium to long-run equilibrium
P costs, revenue, P
MC
S = MC ATC
Pe
0
consumer surplus
P = MR = Pe
Qe
(a) The firm
Q
Pe
producer surplus
0
Qe
D = MB Q
(b) The market/industry
Figure 7.7 Productive and allocative efficiency in perfect competition in the long run
© Cambridge University Press 2012
Economics for the IB Diploma
21
Important diagrams to (a) price, costs, revenue
40 35 30 25 20 15 10 5
TR
0
Pe profit
PED = 1 (unit elastic demand)
PED > 1 (price-elastic demand)
15
PED < 1 (price-inelastic demand)
10
Q
1 2 3 4 5 6 7 8 9 10 11
D = AR Q
Q
max
MC Pe loss
0
P = AR = D
b
MR
5 0
ATC
(b)
Q
1 2 3 4 5 6 7 8 9 10 11
(b) Marginal and average revenue
price, revenue ( )
MC a
0
price, costs, revenue
total revenue ( )
(a) Total revenue
ATC
c d
MR Qlmin
D = AR Q
Figure 7.11 Profit maximisation and loss minimisation in monopoly: marginal revenue and cost approach
-5 MR
MC Pπ
costs
price, costs, revenue
Figure 7.10 Revenue curves in monopoly
Pr
LRATC D
D = AR 0
Qπ
Qr
MR
minimum efficient scale
Q
Figure 7.12 Comparison of profit maximisation and revenue maximisation by the monopolist
© Cambridge University Press 2012
0
Q
Figure 7.13 Natural monopoly
Economics for the IB Diploma
22
Important diagrams to (a) Industry in perfect competition
(b) Monopoly MC
a
Ppc
P = MRpc
D = MB 0
Qpc
price, costs, revenue
price, costs, revenue
S = MC b
Pm
a
Ppc
D = MB 0
Q
Qm
Q
Qpc MRm
Figure 7.14 Higher price, lower output by the firm in monopoly
(a) Perfect competition P
Ppc
(b) Monopoly consumer surplus
P
S = MC A consumer surplus
Pm
producer surplus B
C
D
Qpc
E F
welfare (deadweight) loss
producer surplus
D = MB 0
MC
0
Q
Qm
D = MB
Qpc MRm
Q
Figure 7.15 Consumer and producer surplus and welfare (deadweight) loss in monopoly compared with perfect competition
(b) Monopoly
price, costs, revenue
price, costs
(a) Perfectly competitive firm
MC ATC Pe
0
Qpe
Q
at long-run equilibrium production takes place at min ATC (productive efficiency), and Pe = MC (allocative efficiency)
MC ATC Pe
D 0
Qm
Q MR at long-run equilibrium production takes place at greater than min ATC (productive inefficiency), and Pe > MC (allocative inefficiency)
Figure 7.16 Allocative and productive inefficiency in perfect competition and monopoly
© Cambridge University Press 2012
Economics for the IB Diploma
23
Important diagrams to
economic (supernormal) profit MC Pe
ATC
D = AR 0
Qe
MC
ATC
Pe
D = AR 0
Q
(c) Losses
Qe
price, costs, revenue
(b) Normal profit
price, costs, revenue
price, costs, revenue
(a) Economic profit
losses Pe
D = AR 0
Q
Qe
Q
MR
MR
MR
ATC
MC
Figure 7.21 Short-run equilibrium positions of the firm in monopolistic competition
Intergalactic Space Travel’s price High price Low price 40 million Zs
ATC
Pe
D = AR 0
Qe
Qc MR
Q
Universal Space Line’s price Low price High price
price, costs, revenue
MC 40 million Zs
70 million Zs 10 million Zs
4 10 million Zs
70 million Zs
2 20 million Zs
20 million Zs
3
1
Figure 7.23 Game theory: the prisoner’s dilemma
Figure 7.22 Long-run equilibrium of the firm in monopolistic competition
price, costs, revenue
P MC a
Pe
MC1
ATC
MC2
b
profit
MR 0
Z
P1
Q
max
D
D = AR Q
0
Q1
Q MR
Figure 7.24 Profit maximisation by a price-fixing cartel
© Cambridge University Press 2012
Figure 7.25 The kinked demand curve
Economics for the IB Diploma
24
Important diagrams to P
P
P1
P
P2
Q1
MR1
MR = MR1 + MR2
D2
D1 0
MC
Q
(a) Market 1
0
Q2
(b) Market 2
MR2 Q
0
Q3
Q
(c) Market 1 and market 2
Figure 7.26 Third-degree price discrimination
© Cambridge University Press 2012
Economics for the IB Diploma
25
Important diagrams to
Chapter 8 The level of overall economic activity
u
in (
ho
n tio
households (consumers)
ip rsh eu
uc
land , la bo
ur ,
en pr
land, lab our, eurship cap pren e r t i ta n e resource l, e , l a t nt i markets p re a c o c e sts of com n i p d , l ro es d ho wag rofit) se nt, st, p e r ere t
firms (businesses)
h
ou pe sehol d nd itur e
go o
ds
an ds erv
ices
product markets
es
ex
s nue reve
ds goo
vic er s and
Figure 8.1 Circular flow of income model in a closed economy with no government
factor incomes (wages, rents, interest, profit)
households (consumers)
firms (businesses)
consumer expenditure (spending on goods and services)
di en sp
ng o
tax es ni mp
or t
s
ng
financial markets
t en tm s e i nv
government
ern gov
nt spe di ng ndi ng on e xp orts
savi
me
en sp
other countries
Figure 8.3 Circular flow of income model with leakages and injections
© Cambridge University Press 2012
Economics for the IB Diploma
26
Important diagrams to real GDP actually achieved
real GDP
peak contraction peak
expansion
long term growth trend, or potential GDP trough
trough
0
time (years)
Figure 8.4 The business cycle
actual GDP > potential GDP; there is an output gap: unemployment < natural rate of unemployment expansion: unemployment falls
real GDP
d
contraction: unemployment increases
b a
0
actual GDP
e
actual GDP < potential GDP; there is an output gap: unemployment > natural rate of unemployment
c long term growth trend, or potential GDP = full employment GDP; unemployment = natural rate of unemployment
time (years)
Figure 8.5 Illustrating actual output, potential output and unemployment in the business cycle
© Cambridge University Press 2012
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27
Important diagrams to
Chapter 9 Aggregate demand and aggregate supply (a) The aggregate demand curve
(a) The upward-sloping SRAS curve
price level
price level
SRAS
AD 0
real GDP
(b) Shifts in the aggregate demand curve
(b) Shifts in the SRAS curve
AD1
AD2 0
real GDP
(a) The economy with a deflationary (recessionary) gap
(b) The economy with an inflationary gap
price level
SRAS
Ple
real GDP
Figure 9.2 The short-run aggregate supply curve (SRAS )
Figure 9.1 The aggregate demand (AD) curve
price level
SRAS3 SRAS 1 SRAS 2
price level
price level
AD3 0
real GDP
SRAS
Ple
(c) The economy at the full employment level of output
price level
0
SRAS
Ple
AD AD
0
Ye Yp
0
real GDP
Yp
Ye
real GDP
AD
0
Yp = Ye real GDP
Figure 9.4 Three short-run equilibrium states of the economy
© Cambridge University Press 2012
Economics for the IB Diploma
28
Important diagrams to (a) Changes in aggregate demand
(b) Changes in short-run aggregate supply SRAS3
Pl2 Pl1 Pl3
AD2 AD3
0
AD1
Y3 Y1 Y2
price level
price level
SRAS
SRAS1
SRAS2
Pl3 Pl1 Pl2 AD
0
Y3 Y1 Y2
real GDP
real GDP
Figure 9.5 Impacts of changes in short-run macroeconomic equilibrium
(a) Changes in aggregate demand
(b) Changes in short-run aggregate supply
LRAS
LRAS SRAS2 SRAS1
Pl3 Pl1 AD3
Pl2 AD2
0
AD1
Pl2
SRAS3
Pl1 Pl3 AD
Yrec Yp Yinfl
recessionary (deflationary) gap
price level
price level
SRAS
real GDP inflationary gap
0
Y2 Yp Y3
recession with inflation ('stagflation')
real GDP
higher real GDP with lower price level
Figure 9.6 Possible causes of the business cycle
LRAS price level
SRAS
AD 0
Yp real GDP
Figure 9.7 The LRAS curve and long-run equilibrium in the monetarist/ new classical model
© Cambridge University Press 2012
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29
Important diagrams to (a) Creating and eliminating a deflationary gap
(b) Creating and eliminating an inflationary gap LRAS
LRAS
SRAS1
Pl1
a
Pl2
price level
price level
SRAS1 SRAS2
b c
Pl3
Pl3
c
Pl2 Pl1
b a
AD1 AD2
0
SRAS2
AD1 AD2
0
Yrec Yp
Yp Yinfl real GDP
real GDP Figure 9.8 Returning to long-run full employment equilibrium in the monetarist/new classical model
LRAS Keynesian AS
Pl1
price level
price level
SRAS1 AD1 SRAS2
Pl2
section III
section II
AD2
0
section I
Yp
0
real GDP
(b) Inflationary gap
(c) Full employment equilibrium Keynesian AS
price level
Keynesian AS
price level
price level
Keynesian AS
real GDP
Figure 9.11 The Keynesian aggregate supply curve
Figure 9.9 Changes in long-run equilibrium in the monetarist/new classical AD-AS model
(a) Recessionary (deflationary) gap
Yp Ymax
AD
AD
AD
0
Ye real GDP
Yp
0
Yp Ye real GDP
0
Yp = Ye real GDP
Figure 9.12 Three equilibrium states of the economy in the Keynesian model
© Cambridge University Press 2012
Economics for the IB Diploma
30
Important diagrams to (a) The monetarist/new classical model
(b) The Keynesian model Keynesian AS
Pl1 Pl2
price level
price level
LRAS
AD3
Pl3
AD2 AD1
0
Yp
AD2
AD1
0
real GDP
Y1
Y2
AD3
AD4
Y3 Yp real GDP
Figure 9.13 Effects of increases in aggregate demand on real GDP and the price level
(a) The monetarist/new classical model LRAS2
AS1
0
AS2
price level
price level
LRAS1
(b) The Keynesian model
0
Yp2 real GDP
Yp1
Yp2 real GDP
Yp1
Figure 9.14 Increasing potential output, shifts in aggregate supply curves and long-term economic growth
(a) The monetarist/new classical model
AS1
LRAS2 SRAS1
SRAS2
Pl1
0
AD1 Y1
AD2 Y2
real GDP
AS2
price level
price level
LRAS1
(b) The Keynesian model
AD2
AD1
0
Y1
Y2
real GDP
Figure 9.15 Long-term economic growth: achieving potential (full employment) output in a growing economy
© Cambridge University Press 2012
Economics for the IB Diploma
31
Important diagrams to Higher level topic
Keynesian AS induced spending
$8 million
Pl3 price level
price level
autonomous spending
$24 million $32 million
0
AD1
Y1
AD2
Y2
AD3
Y3
real GDP Figure 9.17 Aggregate demand, real GDP and the multiplier in the Keynesian model
© Cambridge University Press 2012
Pl2 Pl1 AD1
0
Y1
AD2
Y2 real GDP
AD3
AD4
Y3
Figure 9.18 How the effect of the multiplier changes depending on the price level
Economics for the IB Diploma
32
Important diagrams to
Chapter 10 Macroeconomic objectives I: Low unemployment, low and stable rate of inflation P
S2 S1
S price
P1 P2
price
P
P2 P1
D1
D
D2 0
Q2
Q1
0
Q
(a) Fall in demand for a product produced in a declining industry, or produced in a local industry that relocates, causes a fall in Q produced; employers fire workers with inappropriate skills or local workers no longer needed due to relocation
Q2
Q1
price of labour (wage)
P
Wm We
Q
(b) Labour market rigidities lead to an increase in costs of production (supply shifts to the left), causing a fall in Q produced; employers hire fewer workers
labour surplus = unemployment
supply of labour
0
Qe Qs Qd quantity of labour
demand for labour Q
(c) Minimum wage legislation and labour union activities lead to higher than equilibrium wages and lower quantity of labour demanded
Figure 10.1 Structural unemployment (b) The Keynesian model
(a) The monetarist/new classical model
Keynesian AS SRAS
price level
price level
LRAS
Pl1 Pl2 AD1
Pl1 Pl2 AD1 AD2
AD2
0
0
Yrec Yp
Yrec
Yp
real GDP
real GDP Figure 10.2 Cyclical unemployment (a) The monetarist/new classical model
(b) The Keynesian model
LRAS
AS
LRAS
Pl1
0
AD2
Pl2 Pl1
AD2
Yinfl
real GDP Figure 10.4 Demand-pull inflation
© Cambridge University Press 2012
SRAS1
Pl2 Pl1
AD1
AD1
Yp
price level
Pl2
price level
price level
SRAS
SRAS2
AD1 0
Yp Yinfl real GDP
0
Yrec
Yp
real GDP Figure 10.5 Cost-push inflation
Economics for the IB Diploma
33
Important diagrams to Higher level topic
(b) The reasoning behind SRAS shifts in of the AD-AS model
(a) The shifting Phillips curve
price level
rate of inflation
SRAS3 c b a
PC3 PC2 PC1 unemployment rate
0
Pl3
SRAS2
c
Pl2
SRAS1
b a
Pl1
AD 0
Y3 Y2 Y1 real GDP
Figure 10.7 Stagflation: outward shifts of the short-run Phillips curve due to decreasing SRAS
(a) The shape of the LRPC and SRPC
(b) The reasoning behind the two curves in of the AD-AS model LRAS SRAS2
9% 7% 5% 0
c b
SRPC2
a
SRPC1
3% 5% unemployment rate
price level
rate of inflation
LRPC
Pl3
c b SRAS1
Pl2 Pl1
AD2
a
AD1
0
Yp Yinfl real GDP
5% = natural rate of unemployment
Figure 10.8 The short-run and long-run Phillips curves
© Cambridge University Press 2012
Economics for the IB Diploma
34
Important diagrams to
Chapter 11 Macroeconomic objectives II: Economic growth and equity in the distribution of income 100
Y
B A 0
X
(b) Economic growth as an increase in production possibilities caused by increases in resource quantities or improvements in resource quality
cumulative percentage of income
(a) Economic growth as an increase in actual output caused by reductions in unemployment and productive inefficiency
80
60
d
Belarus f
20 e a 0
B
h
g
40
Y
C
perfect income equality
b
c Bolivia
40 80 20 60 cumulative percentage of population
100
Figure 11.3 Lorenz curves: Belarus achieves greater income equality than Bolivia
A
100 PPC1 PPC2 PPC3 X
Figure 11.1 Using the production possibilities model to illustrate economic growth
cumulative percentage of income
0
80
60
perfect income equality increased income equality after redistribution
40
20
0
before redistribution
40 80 20 60 cumulative percentage of population
100
Figure 11.4 Lorenz curves and income redistribution
© Cambridge University Press 2012
Economics for the IB Diploma
35
Important diagrams to
Chapter 12 Demand-side and supply-side policies (a) The monetarist/new classical model
(a) The monetarist/new classical model
LRAS
price level
price level
LRAS SRAS
Pl2 Pl1 AD2
SRAS
Pl1 Pl2
AD1 AD2
AD1
0
Yrec Yp
0
real GDP
Yp Yinfl real GDP potential output
(b) The Keynesian model (b) The Keynesian model
AS
Pl2 Pl1
price level
price level
Keynesian AS
Pl1 Pl2
AD1 AD2
AD2 AD1
Yrec
Figure 12.1 Effects of expansionary policy: eliminating a recessionary (deflationary) gap
price level
(a)
potential output
Figure 12.2 Effects of contractionary policy: eliminating an inflationary gap
(b)
Partial crowding out
due to G
SRAS
due to I
AD2
Complete crowding out
Y2
AD2
AD1
AD1
Y1 Y3 real GDP
SRAS due to G
due to I
AD3
0
Yp Yinfl real GDP
Yp real GDP
price level
0
0
0
Y1 Y2 real GDP
Figure 12.3 Crowding out of private investment
© Cambridge University Press 2012
Economics for the IB Diploma
36
Important diagrams to (a) Equilibrium rate of interest
(b) Changes in the supply of money cause changes in the equilibrium rate of interest Sm3 rate of interest
rate of interest
Sm
i Dm 0
Qe quantity of money
Sm1
Sm2
i3 i1 i2 0
Dm Q3 Q1 Q2 quantity of money
Figure 12.4 The money market and determination of the rate of interest
© Cambridge University Press 2012
Economics for the IB Diploma
37
Important diagrams to
(a) Country A: absolute advantage in good Y; Country B: absolute advantage in good X
(b) Country A: comparative advantage in good Y; Country B: comparative advantage in good X
good Y
Chapter 13 International trade
0
good Y
good Y
0 country A country B
0
good X
country A’s PPC country B’s PPC good X
country A country B
Figure 13.5 Identical opportunity costs: no gains from trade
good X
Figure 13.3 Absolute and comparative advantage Opportunity cost of cotton
Opportunity cost of microchips
(2) Microchips
(3)
(4)
Production possibilities when each country produces only cotton or only microchips (1) Cotton Cottonia Microchippia
20
or
10
10 units of microchips 1 = 20 units of cotton 2
20 units of cotton =2 10 units of microchips
25
or
50
50 units of microchips =2 25 units of cotton
25 units of cotton 1 = 50 units of microchips 2
Table 13.2 Comparative advantage (a) Cottonia exports 10 units of cotton and imports 10 units of microchips 25
25
cotton
20 Microchippia’s PPC
15
0
15 B consumption
10 5
10 5
cotton
20 A production
Cottonia’s PPC
10 20 30 40 50 60 microchips
0
10 20 30 40 50 microchips
(b) Microchippia exports 10 units of microchips and imports 10 units of cotton 25 20 cotton
Figure 13.2 Comparative advantage
15 10 5 0
D consumption C production 10 20 30 40 50 microchips
Figure 13.4 The gains from specialisation and trade based on comparative advantage: both countries consume outside their PPC
© Cambridge University Press 2012
Economics for the IB Diploma
38
Important diagrams to (a) Effects on imports
Sd =
P
domestic supply
Pd Pw + t
government revenue world price + tariff
Pw
world price = world supply curve
0
tariff
Q1
Q3
Q2
Q4
Dd = domestic demand
Q
Dd = domestic demand
0
Q1
Q3
Q2
imports without quota
domestic supply
b e
a d
Q
tariff
f
world price = world supply curve
Q2
Q3
Q4
Sd = domestic supply
P a
world price + tariff
Dd = domestic demand
Q1
Q4
(b) Welfare effects
Sd =
welfare loss = d + f
0
world price = world supply curve
Pw
imports without tariff
c
plus quota
Pq
imports with quota
P
Pw g
Sdq = domestic supply
quota
quota revenue
imports with tariff
(b) Welfare effects
Pw + t
Sd = domestic supply
P
(a) Effects on imports
Pq Pw g
b c
Sdq = domestic supply plus quota
quota
d e
welfare loss = d + e + f
e f
world price = world supply curve
Q
imports with tariff
Dd = domestic demand
0
imports without tariff
Q1
Q2
Q3
Q4
Q
imports with quota imports without quota
Figure 13.9 Effects of a quota
Figure 13.7 Effects of a tariff
(a) Production subsidy: quantity of imports falls
Sd = domestic supply Sds = domestic
P
subsidy
Ps
supply minus subsidy world price = world supply curve
Pw
Dd = domestic demand 0
Q1
Q3
Q2
Q
imports after subsidy imports before subsidy
Figure 13.11 Production subsidies
© Cambridge University Press 2012
Economics for the IB Diploma
39
Important diagrams to
Chapter 14 Exchange rates and the balance of payments (a) Demand for $ increases: $ appreciates
per $ = price of $ in of
per $ = price of $ in of
(a) The market for US dollars S of $
excess supply of $
(dollars)
0.80
equilibrium exchange rate
0.67 0.50
excess demand for $
D for $ (dollars)
0
Q of $ (dollars)
2.00 equilibrium exchange rate
1.50 1.25
D for
excess demand for
(euros)
Q of (euros)
$ per bople = price of boples in of $
(a) Shifting the currency demand curve
2. central bank buys excess boples, increasing demand for boples
A
1. fall in demand for Bopland's exports reduces demand for boples
C D2 for boples
0
D2 for $
D1 for $ 0
Q of $ (dollars)
S1 of S2 of
D
1.50
F
1.11
E
D for 0
Q of (euros)
Figure 14.2 Exchange rate changes in a freely floating exchange rate system
(b) Shifting the currency supply curve
S of boples
B
B
A
0.67
$ per = price of in of $
(euros)
Q of boples
D1 for boples
$ per bople = price of boples in of $
$ per = price of in of $
S of
excess supply of
Figure 14.1 Exchange rate determination in a freely floating exchange rate system
2.00 1.50
C
0.90
(b) Supply of € increases: € depreciates
(b) The market for euros
0
S of $
S1 of boples
S2
2.00
B
2. imports are reduced, therefore the supply of boples falls
A
1. fall in demand for Bopland's exports reduces demand for bople
D2 for boples 0
D1 for boples
Q of boples
Figure 14.3 Fixed exchange rates: maintaining the value of the bople at 1 bople = $2.00
© Cambridge University Press 2012
Economics for the IB Diploma
40
Important diagrams to (a) With a trade deficit, country consumes outside its PPC
good A
C
0
PPC
good B
good A
(b) With a trade surplus, country consumes inside its PPC
D PPC
0
good B
Figure 14.6 Using a PPC to illustrate a trade deficit and a trade surplus
© Cambridge University Press 2012
Economics for the IB Diploma
41
Important diagrams to
Chapter 15 Economic integration and the of trade Higher level topic
global price of internationally traded good
S global supply of wheat
P2 P1
D2 global demand D1 for wheat
P3 D3 0
Q3
Q1
Q2
quantity of internationally traded good
global price of internationally traded good
(b) Changes in global supply: effects of of trade changes on the balance of trade depend on PEDs for exports and imports
(a) Changes in global demand: of trade and balance of trade change in same direction
S3
S1 global supply
P3
S2
P1 P2
global demand D
0
Q3 Q1
Q2
quantity of internationally traded good
Figure 15.1 Changes in global demand or supply: of trade impacts on the balance of trade
P
S1
S2
P1 P2 D2 D1 0
Q
Figure 15.2 Long-term declines in primary product prices due to low growth in demand (due to low YEDs) and high growth in supply (due to technological advances)
© Cambridge University Press 2012
Economics for the IB Diploma
42
Important diagrams to
Chapter 16 Understanding economic development
industrial goods
A→B: no economic growth with some development B→C: economic growth with no development B→D or E: economic growth with development
0
C D
A B PPC1
E PPC2
merit goods
Figure 16.1 Economic growth and economic development
low income
low savings
low investment
low physical capital
low growth in income
low human capital
low natural capital
low productivity of labour and land
Figure 16.2 The poverty cycle (poverty trap)
© Cambridge University Press 2012
Economics for the IB Diploma
43
World Bank country classification The World Bank classifies countries into four groups according to income levels (based on 2008 GNI per capita): • Economically less developed countries: ο low income, with GNI per capita of US$975 or less ο lower middle income, with GNI per capita of $976–$3855 ο upper middle income, with GNI per capita of $3856–$11 905. • Economically more developed countries: ο high income, with GNI per capita of $11 906 or more. Table 16 World Bank country groups by 2008 GNI per capita
Low income economies Afghanistan Bangladesh Benin Burkina Faso Burundi Cambodia Central African Rep. Chad Comoros Congo, Dem. Rep. Eritrea
Lower middle income economies Albania
Guatemala
Angola
Guyana
Armenia
Honduras
Vietnam
Bhutan Bolivia Cameroon
India Indonesia Iran, Islamic Rep.
Nicaragua Nigeria Pakistan
Niger Rwanda
Yemen, Rep. Zambia
Cape Verde China
Iraq Jordan
Senegal
Zimbabwe
Congo, Rep. Côte d’Ivoire Djibouti
Kazakhstan Kiribati Kosovo
Palau Papua New Guinea Paraguay Philippines Samoa
Ecuador
Lesotho
Egypt, Arab Rep. El Salvador
Macedonia, FYR Maldives
Ethiopia Gambia, The Ghana Guinea Guinea-Bissau Haiti Kenya
Madagascar Malawi Mali Mauritania Mongolia Mozambique Myanmar
Sierra Leone Somalia Tajikistan Tanzania Togo Uganda Uzbekistan
Korea, Dem. Rep. Kyrgyz Rep. Lao PDR
Nepal
Liberia
Marshall Islands Micronesia, Fed. Sts Morocco
Sudan Swaziland Syrian Arab Republic Thailand Timor-Leste Tonga Tunisia Turkmenistan Ukraine Vanuatu West Bank and Gaza
São Tomé and Principe Solomon Islands Sri Lanka (continued over)
© Cambridge University Press 2012
Economics for the IB Diploma
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