ppfs and other diagrams

PPFs and Other Diagrams

Output of capital goods

Out

pu

t of

co

nsu

me

r g

ood

s a

nd s

erv

ice

s

A

B

C

Heart Operations

All

Oth

er

Op

era

tio

ns

A

B

C

Output (Q)

CostsRevenues

SAC1

SAC2

AR (Demand)

Basic Supply and Demand Analysis

Demand Curve

Price

Quantity Demanded

Demand

P1

P2

P3

Q1Q2 Q3

Shift in demand

Price

Quantity Demanded

D1

P1

Q1Q2 Q3

D3D2

Price

Demand

Price

Demand

Relatively Inelastic Demand

Consumer Surplus and Price Elasticity of Demand

P1

Q1 Q2

Relatively Elastic Demand

Price

Demand

Price

Demand

Relatively Inelastic Demand

Consumer Surplus and Price Elasticity of Demand

P1

Q1 Q2

Relatively Elastic Demand

Quantity Demanded Quantity Demanded

Price Price

Perfectly Elastic Demand Perfectly Inelastic Demand

Demand

Demand

Quantity Quantity Q1Q2 Q3

P1 P1

P2

P3

Q1

Price Price

Perfectly Elastic Supply Perfectly Inelastic Supply

Supply

Supply


P1 P1

P2

P3

Q1

Price Price

Relatively Elastic Supply

Supply responds quickly to a change in demand

Relatively Inelastic Supply

Supply responds less than proportionately to a change in price

Supply

Supply


P1

P1

P2

P3

Q1

D3D2D1

P2P3

D3D2

D1

Price

Quantity

D1

Supply

P1

Q1

D2

P2

Q2

Price of DVD

players

Quantity demanded

D1

Supply of DVD

players

P1

Q1

D2

P2

Q2

Price of Sterling in

Euros

Quantity of Pounds Sterling

Demand 1

Supply

P1

Q1

Demand 2

P2

Q2

Price

Quantity

D1

S1

P1

Q1

D2

P2

Q2

S2

P3

Q3

Price

Quantity of Council Housing

Demand

S1

P1

Q1

P2

Q2

Supply + Sub

P3

Government Subsidy

Subsidy per unit

Average Weekly Rent £

Quantity of Council Housing

Demand

S1

P1

Q1

P2

Q2

Supply + Subsidy

Government Subsidy

Subsidy per unit

Price

Quantity

Demand

Supply pre subsidy

Q1 Q2

Supply + Export Subsidy

A

B

C

D

E

F

G

Price

Quantity

D1

S1

P1

Q1

S2

P2

Q2

Price

Quantity

D1

S2

A

S1

B

C

DE

F

G H

IJ

Price

Quantity

Demand

Supply post tax Supply pre tax

P2

P1

Q1

Price

Quantity

Price

Quantity

Price

Quantity

Price

Quantity

SupplySupply

Supply Supply

A B

C D

Supply curves with different price elasticity

Price

Quantity

Price

Quantity

Price

Quantity

Price

Quantity

Demand

Supply

Demand

A B

C D

Demand curves with different price elasticity

Demand

Demand

Price

Quantity

D1

Supply

P1

Q1

D2

P2

Q2

Price of Good S

Quantity demanded of Good T

Demand

Price

Quantity

D2

S1

P2

Q2

D1

P1

Q1

S2

Price

Quantity

D2

P1

Q1

S pre subsidy

Price

Quantity

D2

P1

Q1

S pre subsidy

Price

Quantity

Demand

Supply

P max

Q1

Maximum Prices

Pe

Price Ceiling

Q2

Free Market Equilibrium

Excess Demand

Rent

£s

Quantity of Rented Property

Demand

Supply

P max

Q1

Maximum Prices

Pe

Price (Rent) Ceiling

Q2

Free Market Equilibrium

Excess Demand

Price

Quantity

Demand

Supply

P max

C

Maximum Prices

Pe

Maximum Price

A B D

Price

Quantity of output

Demand

Supply

P min

Q1

Pe

Price Floor (Guaranteed)

Q2

Excess Supply

Q3

Price

Quantity

Demand

Supply

P min

Price Support Schemes – Buffer Stocks

Pe

Minimum Price

B CA

Price

Quantity

Demand

Supply

P min

Q1

Price Support Schemes – Buffer Stocks

Pe

Price Floor (Guaranteed)

Q4Q3

S2

Price

Quantity

Demand

S1

P1

P2

Q3Q2

S2

Price

Quantity

Demand

S1

P1

Increasing Market Supply – Consumer Benefits

P2

Q3Q2

S2

Price

Quantity

Demand

Supply

P1

Q1

Equilibrium Point

Producer Surplus

Producer Surplus

Price

Quantity

Demand

Supply

P1

Q1

Producer Surplus

B

A

C D

Price

Quantity

Demand

Supply

P1

Q1

Equilibrium Point

Consumer Surplus

Consumer Surplus

Price

Quantity

Demand

Supply

P1

Q1

Equilibrium Point

Market Equilibrium

Market Failure Diagrams

Social Efficiency / Welfare Losses

Output (Q)

Demand = Private Benefit = Social Benefit

Private Marginal Cost (Supply)

Q1

Costs

Revenues

Social Marginal Cost

Q2

External Cost

P1

P2

Benefits

Costs

Quantity of Output (Q)

Demand (Private Marginal Benefit)

Marginal Private Cost

P1

Q1

Social Equilibrium

Negative Externalities

Marginal Social Cost

Q2

a

b

c

Tackling Externalities


Taxation

Pollution Trading Schemes

Tax Credits

Voluntary Agreement

Regulation

Aggregates Levy

Landfill Tax

Fuel Duty

Climate Change Levy (CCL)

Emissions trading scheme

Landfill permits

Pesticides

EU C02 from cars agreement

Water quality legislation

Reduced VAT on installation of central heating

Benefits

Costs


Demand (Private Marginal Benefit) =

Social Marginal Benefit (SMB)


P1

Q1

Social Equilibrium

Loss of Social Welfare from Externalities


Q2

a

b

c

Deadweight loss of economic welfare

Marginal External Cost

Merit Goods

CostsBenefits

Quantity of Housing

Private Demand

Supply

Demand + External Benefits

Qp Qs

External Benefit

A

B

Merit Goods and Welfare Loss

CostsBenefits

Output (Q)

PMB

PMC = SMC

SMB

Qp Qs

External Benefit

Welfare loss where SMB>PMB above output

QpA

B

C

The Demand Curve for Public Goods

CostsBenefits

Output (Q)

Demand from A

Value 1

Q1

Demand from B

Value 1

Value 2


CostsBenefits

Output (Q)

Demand A

Value 1

Q1

Demand B

Value 1

Value 2

Demand A+B

Socially Efficient Provision of Public Goods

CostsBenefits

Output (Q)

Demand A Demand B

Demand A+B


(MSC)

Qp


CostsBenefits

Output (Q)

PMB = SMB

PMC

SMC

QpQs

External Cost

Net Welfare Loss


Negative Externalities – Pollution Tax

CostsBenefits

Output (Q)

PMB = SMB

PMC

SMC

QpQs

PMC + TAX

Price

Quantity

Demand (Limited Information)


P1

Q1

De-Merit Goods and Health Awareness


Q2Q3

Demand (Full Information)

Price

Quantity

Domestic Demand

Domestic Supply

P1

Q1

Export Subsidy

Domestic Price

World Price

World Price + Sub

P2

P3

Q2Q3

Price per

tonne

Quantity

Domestic Demand

Domestic Supply of Coal

P1

Q1

Coal Export Subsidy

Domestic Price

World Price

World Price of Coal + Subsidy

P2

P3

Q2Q3

Price

Quantity

Domestic Demand

Domestic Supply

P1

Q1

Import Tariffs

World Price

World Price + Tariff

P2

Q4Q3 Q2

A B

CD

E F

G H

Price

Quantity

D1

Supply

P1

Q1

Consumer Surplus

Outward Shift in Demand

Price

Quantity

Demand

S1

P1

Q1

Consumer Surplus

S2

P2

Q2

D2

P2

Q2

Outward Shift in Supply

Price

Quantity

D2

SRS

P2

Q1

Price

Quantity

D1

S1

P1

Q1

D3

Q3

P3

D1

Q2

P1

An Outward Shift in DemandAn Inward Shift in Demand

Price

Quantity

D2

SRS

P1

Q2

Price

D1

Q1

P2

An Outward Shift in Market Demand –

Long Run Market Supply is more Elastic

An Outward Shift in Market Demand –

Short Run Market Supply is Inelastic

Quantity

SRS

P1

Q2

D1

Q1

P2

D2

LRS

Q3

a

b

Price

Quantity

D1

S1

P1

Q1

Price

Quantity

D1

S1

P1

Q1

D3

Q2

P2

D2

Q2

P2

An Outward Shift in Demand and a Rise in SupplyAn Inward Shift in Demand and a Fall in Supply

S2

S2

Quantity

D1

S1

P1

Q1

D2

Q2

P2

An Outward Shift in Coffee Demand and a Rise in Coffee Supply

S2

Quantity

D1

S1

P1

Q1

D2

Q2

P2

An Outward Shift in Oil Demand when Supply is Inelastic

Quantity of DVD players

D1

S1

P1

Q1

D2

Q2

P2

Price of DVD players

Price

Quantity

D1

S1

P1

Q1 Q2

P2

S2

Price

Quantity

S1

Q1

Price

Quantity

D1

S1

P1

Q1 Q3

P3

D2

Q2

P1

An Outward Shift in SupplyAn Inward Shift in Supply

S2

P2

S3

Price

Quantity

S1

Q1

Price

Quantity

D1

S + Tax

P2

Q2 Q1

P1D1

Q2

P1

A Tax when Demand is Price InelasticA Tax When Demand is Price Elastic

S + Tax

P2

S1

Indirect Taxes and Elasticity of Demand

Price

Quantity

Supply

P1

P2

P3

Q1Q3 Q2

Price

Quantity

P2

P3

P1

Q2Q1 Q3

P4

P5

Supply

Q4 Q5

Price

Quantity

S1

P1

Q1Q3 Q2

S2

S3

Increase in Supply

Decrease in Supply

Theory of the Firm Diagrams

Costs

Output (Q)

Fixed Costs

Total Fixed Cost

Average Fixed Cost

1

£2000

£1000

2

Costs

Output (Q)

Short Run Cost Curves

Average Fixed Cost (AFC)

Average Variable Cost (AVC)

Average Total Cost (ATC)

Marginal Cost (MC)

Costs

Output (Q)

Short Run Cost Curves

A

Costs

Output (Q)

Increase in Variable Costs

Average Variable Cost (AVC)

Average Total Cost (ATC)

Marginal Cost (MC)

MC2 AC2

AVC2

Costs

Output (Q)

The Long Run Average Cost Curve

SRAC1

SRAC2SRAC3

Q1 Q2 Q3

AC1

AC2

AC3

Costs

Output (Q)

The Long Run Average Cost Curve

SRAC1

SRAC2SRAC3

Q1 Q2 Q3

AC1

AC2

AC3

LRAC

Costs

Output (Q)

The Minimum Efficient Scale (MES)

SRAC1

SRAC2SRAC3

Minimum Efficient Scale

LRAC

Economies of scale (falling LRAC) due to increasing returns

Diseconomies of scale (rising LRAC) due to decreasing returns to scale

Costs

Output (Q)

Economies of Scale and Profits

SRAC1

SRAC2

AR (Demand)

MR

MC1

MC2

P1

P2

Q1 Q2

Profit at Price P1

Profit at Price P2

Costs

Output (Q)

Different output levels (1)

ATC

AR (Demand)

MR

MC

A B C D

Costs

Output (Q)

Different output levels (2)

ATC

AR (Demand)

MR

MC

A B C D

Monopoly Price and Output in the Short Run

ATC

Demand (AR)

MR

MC

Q1

RevenueCost and

Profit

Output (Q)

P1

AC1

Monopoly versus Competition

LRAC = LRMC

Monopoly Demand (AR)

MR

Q1

RevenueCost and

Profit

Output (Q)

D

E

Qc

B

A

C

Monopoly versus Competition (Welfare Loss)

LRAC = LRMC


MR

Q1

Monopoly Profit at Price P1

RevenueCost and

Profit

Output (Q)

P1

Pc

Qc

B

A

C

Deadweight Welfare Loss

Natural Monopoly

Demand (AR)

RevenueCost and

Profit

Output (Q)

LRMC

LRAC

Natural Monopoly – losses and profits

Demand (AR)

RevenueCost and

Profit

Output (Q)

MR

LRMC

LRAC

P1

AC1

Q1 Q2

P2

AC2

Profit at price P1

Loss at price P2

Benefits from Cross Subsidisation


RevenueCost and

Profit

Output (Q)

MR

MC

AC

RevenueCost and

Profit

Output (Q)

AC

AR

MC

MR

Barriers to Entry – Blockaded Entry

LRAC = LRMC (Existing Monopolist)


MR

Q1

RevenueCost and

Profit

Output (Q)

P1

Pc

Qc

B

A

C

AC = MC (Potential Entrant into the market)

DE

Costs,

Revenues

Output (Q)

The Shut Down Price

ATC

AR (Demand)

MR

P1

Q1Q2

MC

AVC

AR2

MR2

P2

Costs,

Revenues

Output (Q)

The Shut Down Price

ATC

Q1

MC

AVC

AR2

MR2

P1

AC1A

B

C

Costs,

Revenues

Output (Q)

The Short Run Supply Curve

ATCMC = supply

AVC

P1The Shut Down Price

P2Break-Even Price

Q1

Output (Q)

Profits and an Increase in Variable Costs

SRAC1

AR (Demand)

MR

MC1

Q2 Q1

Profit at Price P2

Profit at Price P1

Costs

Revenues

P1

AC1

SRAC2

MC2

P2

AC2

Output (Q)

Total Cost (TC)RevenueCost and

Profit

Q1Q2 Q3

Total Profit

Max Profit

Min Profit

Q4

Total Revenue (TR)

Profit Max Revenue Max

Total Revenue and Cost (1)

Output (Q)


Profit

Q1 Q2

Total Revenue (TR)

Break Even TR=TC

Total Revenue and Cost under Perfect Competition

Output (Q)


Profit Total Revenue (TR)

Multi Choice Questions on This

A

0

B

C

D E

F

G

H

Output (Q)

RevenueCost and

ProfitTotal Revenue

(TR)

Total Revenue with a Perfectly Elastic Demand Curve

Average Revenue (AR) = Marginal Revenue (MR)

£3

1 2

£6

Output (Q)

RevenueCost and

Profit

Total Revenue (TR)

Total Revenue with a downward sloping demand curve

Marginal Revenue (MR)

Average Revenue (Demand) AR

Output (Q)

RevenueCost and

Profit

Total Revenue (TR)

Total Revenue with a downward sloping demand curve

Marginal Revenue (MR)

Average Revenue (Demand) AR

Total Revenue is maximised when

MR = 0

Price elasticity of demand = 1 at

this output

Demand Curves with Different Elasticity and Total Revenue

Market A Market B

QuantityQuantity

PricePrice

Pa

Pb

ARb

ARa

Higher revenue from reducing the price from Pa to Pb (the gain in quantity sold more than offsets the lower price per unit)

Demand in segment B of the market is relatively inelastic. A higher unit price is charged and total revenue also increases

QbQa Qb

Pb

Qa

Pa

Costs

Output (Q)

Profit Maximisation and Sales Revenue Max

SRAC

AR (Demand)

MR

MC

Q1

P1

AC1

Profit Max at Price P1

P2

AC2

Q2

Revenue Max at Price P2

Costs

Revenues

Output (Q)

Contestable Markets and The Conduct of Firms

SRAC

AR (Monopoly)

MR

MC

Q1

P1


P2

Q2

Normal Profit output where

AC=AR

The Kinked Demand Curve

Assume we start out at P1 and Q1:

Will a firm benefit from raising price above P1?

Will it benefit from cutting price below P1?

Raising price above P1

Demand is relatively elastic

Firm loses market share and some total revenue

Reducing price below P1

Demand is relatively inelastic

Little gain in market share – other firms have followed suit

Total revenue may still fall

Costs

Revenues

Output (Q)

P1

Q1

MR

AR

MC1

The Kinked Demand Curve – Rising MC

Costs

Revenues

Output (Q)

P1

Q1

MR

AR

MC1

The Kinked Demand Curve – Rising MC

Costs

Revenues

Output (Q)

P1

Q1

MR

AR

MC1

MC2

MC3

P2

Q2

Introduction to Game Theory

Two prisoners are held in a separate room and cannot communicateThey are both suspected of a crimeThey can either confess or they can deny the crimePayoffs shown in the matrix are years in prison from their chosen course of actionDecisions made under uncertainty

Prisoner A

Confess Deny

Prisoner B

Confess (3 years, 3 years)

(1 year, 10 years)

Deny (10 years, 1 year)

(2 years, 2 years)

Introduction to Game Theory (2)

The equilibrium in the Prisoners’ Dilemma occurs when each player takes the best possible action for themselves given the action of the other playerThe dominant strategy is each prisoners’ unique best strategy regardless of the other players’ action

Best strategy? Confess?A bad outcome – prisoners could do better by both denying – but once collusion sets in, each prisoner has an incentive to cheat!

Prisoner A

Confess Deny

Prisoner B

Confess (3 years, 3 years) (1 year, 10 years)

Deny (10 years, 1 year) (2 years, 2 years)

Individual Firm Industry

Firms Output Industry Output

MC (industry)

Demand

MC

Price Fixing Cartels

AC

MR

Individual Firm Industry

Firms Output

MC (industry)

Demand

MR

P(cartel)

MC

AC

Quota IndustryOutput

P(cartel)

AC

Price Fixing Cartels

Costs

Revenues

Allocative Efficiency

Output (Q)

AR (Demand)

MC (Supply)

P1

Q1

Consumer Surplus (CS)

Producer Surplus (PS)

Costs

Revenues

Natural Monopoly and Efficiency

Output (Q)

AR (Demand)

Long Run Marginal Cost (LRMC)

P1

Q1

Profit Maximisation

Q2

Long Run Average Cost (LRAC)

MR

AC1

Cost per Unit

Natural Monopoly and Efficiency

Output (Q)

Long Run Average Cost (LRAC)

Constant returns to scale

Minimum Efficient Scale

Price Discrimination (1st Degree)


Price (P)

AR (Market Demand)MR

P1

AC = MC

Q1

P2

P4

Q3Q2

Equilibrium output with perfect price discrimination – the monopolist will sell an extra unit providing that the next unit adds as much to revenue as it does to cost

P3

P5

Q4 Q5

Supply (Marginal Cost)

Off-Peak Demand

Peak Demand

MR Off-Peak

MR Peak

Price Off-Peak

Price Peak

Output Off-Peak Output Peak

Price (P) and Costs

Output

Peak and Off Peak Pricing

Market A Market B

MC=AC

QuantityQuantity

PricePrice

Pa

Pb

MRa

MRb ARb

ARa

Profit from selling to market A – with a relatively elastic demand – and charging a lower price

Demand in segment B of the market is relatively inelastic. A higher unit price is charged

MC=AC

QbQa

Price Discrimination (1)

Perfect Competition (1)

Output (Q)Output (Q)

Market Demand and Supply Individual Firm’s Costs and Revenues

Price (P) Price (P)

Market Demand

Market Supply

P1

Q1

AR (Demand) = MR

MC (Supply)

AC

P1

AC1

Q2

Perfect Competition – Sub Normal Profits



Price (P) Price (P)

Market Demand

Market Supply

P1

Q1

AR = MR

MC

AC

AC1

Q2

Perfect Competition (2) Increase in Market Supply



Price (P) Price (P)

Market Demand

Market Supply

P1

Q1

AR1 = MR1

MC (Supply)

AC

P1

Q3

P2P2

AR2 = MR2

Q2

MS2

P2

Comparing Monopoly with Perfect Competition

Output (Q)

Competitive Market Pure Monopoly

Price (P) Price (P)

Market Supply

Market Demand

Market Supply

Monopoly Demand

Q1 Q1

MR

P comp

P mon

Q2

Net loss of producer surplus

Welfare Loss Under Pure Monopoly

Output (Q)


Price (P) Price (P)

Market Supply

Market Demand

Market Supply

Monopoly Demand

Q1 Q1

MR

P comp

P mon

Q2

Net loss of consumer surplus

Net loss of producer surplus

A

B

C

D

Pure Monopoly and Scale Economies

Output (Q)


Price (P) Price (P)

Market Supply

Market Demand

Competitive Supply (MC)

Monopoly Demand

Q1 Q1

MR

P comp

P mon

Q2

Monopoly Supply with

Scale Economies

Costs

Output (Q)

Profit Maximisation and a Rise in Demand

SRAC

AR1 (Demand)

MR1

MC

Q1

P1

AC1


P2

AC2

Q2


AR2

MR2

Cost per

unit in the

long run

Output (Q)

Minimum Efficient Scale (MES)

LRAC

MES

Falling LRAC – Economies of Scale (Increasing Returns to Scale)

Rising LRAC – Diseconomies of Scale (Decreasing Returns to Scale)

Costs per

unit in the

long run

(ATC)

Output (Q)

Minimum Efficient Scale (MES) and Market Size

LRAC1

LRAC3

LRAC2

MES2MES1 MES3

Benefits

Costs


Demand (Private Marginal Benefit) =

Social Marginal Benefit (SMB)


P1

Q1

Social Equilibrium

Loss of Social Welfare from Externalities


Q2

a

b

c

Deadweight loss of economic welfare


Merit Goods

CostsBenefits

Quantity of Housing

Private Demand

Supply

Demand + External Benefits

Qp Qs

External Benefit

A

B

Merit Goods and Welfare Loss

CostsBenefits

Output (Q)

PMB

PMC = SMC

SMB

Qp Qs

External Benefit

Welfare loss where SMB>PMB above output

QpA

B

C


CostsBenefits

Output (Q)

Demand from A

Value 1

Q1

Demand from B

Value 1

Value 2


CostsBenefits

Output (Q)

Demand A

Value 1

Q1

Demand B

Value 1

Value 2

Demand A+B

Socially Efficient Provision of Public Goods

CostsBenefits

Output (Q)

Demand A Demand B

Demand A+B


(MSC)

Qp


CostsBenefits

Output (Q)

PMB = SMB

PMC

SMC

QpQs

External Cost

Net Welfare Loss


Negative Externalities – Pollution Tax

CostsBenefits

Output (Q)

PMB = SMB

PMC

SMC

QpQs

PMC + TAX

Price

Quantity

Demand (Limited Information)


P1

Q1

De-Merit Goods and Health Awareness


Q2Q3

Demand (Full Information)

Price

Quantity

P2

P3

P1

Q2Q1 Q3

P4

P5

Supply

Q4 Q5

Macroeconomics Diagrams for IB Economics

Market interest rates e.g. savings rates & credit cards

Asset pricese.g. house prices

Expectations andConfidence

Businesses & consumers

Exchange rate

Official Interest Rate

Set by the MPC

Domestic Demand

i.e. C + I + G

Net External Demandi.e. X - M

AggregateDemand

ADDrives short-term

Economicgrowth

Domesticinflationary

Pressurei.e. changes

in the output gap(actual GDP relative

to potential GDP)

ImportPrices

Consumer Price Inflation

How interest rates affect us

Aggregate Demand and Supply Analysis

General Price Level

Real National Income

AD

Aggregate Demand and Supply

A

B

General Price Level


AD


A

B

P1

P2

Y1 Y2

SRAS2

SRAS2

General Price Level

National Income

AD

SRAS

Pe

Ye


LRAS

Yfc

General Price Level

National Income

AD1

SRAS

Pe

Ye

Negative Output Gap

LRAS

Yfc

AD2

Y2

P2

General Price Level


AD1

SRAS

P1

Y1

AD-AS Analysis Causes of Deflation

LRAS

Yfc

AD2

Y2

P2

General Price Level

AD1

SRAS

P1

Y1

LRAS1 LRAS2

YFC2Y2

AD2

P2

Fall in AD Rise in LRAS greater than increase in AD

General Price Level

AD1

SRAS

P1

Y1

LRAS1 LRAS2

YFC2Y2

AD2

P2

General Price Level

National Income

AD1

SRAS

Pe

Y1

An Increase in Long Run Aggregate Supply

LRAS1 LRAS2

YFC2Y1

AD2

General Price Level


An Increase in Long Run Aggregate Supply

LRAS1 LRAS2

YFC2YFC1

SRAS1

SRAS2

General Price Level

National Income

AD

SRAS1

P1

Y1


LRAS

Yfc

SRAS2

P2

Y2

General Price Level

National Income

AD1SRAS

P1

Y1

Shifts in Aggregate Demand

LRAS

Yfc

AD2

P2

Y2

AD3

Y3

P3

General Price Level


AD1

SRAS

P1

Y1

The Risk of Demand Pull Inflation

LRAS

Yfc

AD2

P2

Y2

AD3

P3

General Price Level


AD1

SRAS1

P1

Y1

External Shock – Higher Oil Prices and a Tightening of Monetary Policy

LRAS

Yfc

SRAS2

P2

Y2

AD2

Y3

General Price Level

National Income

AD

SRAS1

P1

Y1

Shifts in Short Run Aggregate Supply

LRAS

Yfc

SRAS2

P2

Y2

SRAS3

Y3

General Price Level

National Income

AD1

SRAS

P1

Y1

An Increase in Aggregate Demand

LRAS

Yfc

AD2

P2

Y2

General Price Level

National Income

AD2

SRAS

P2

Y2

A Fall in Aggregate Demand

LRAS

Yfc

AD1

P1

Y1

Market interest rates e.g. savings rates & credit cards

Asset pricese.g. house prices

Expectations andConfidence

Businesses & consumers

Exchange rate

Official Interest Rate

Set by the MPC

Domestic Demand

i.e. C + I + G

Net External Demandi.e. X - M

AggregateDemand

ADDrives short-term

Economicgrowth

Domesticinflationary

Pressurei.e. changes

in the output gap(actual GDP relative

to potential GDP)

ImportPrices

Consumer Price Inflation

Short Run Phillips Curve

Wage Inflation

(%)

Unemployment Rate (%)U1

P1

U2

P2

U3

P3

Short Run Phillips Curve

Expectations-Augmented Phillips Curve

Wage Inflation

(%)

Unemployment Rate (%)U1

P1

U2

P2

U3

P3

SRPC1

SRPC2

SRPC3

Real Wage Rate

Hours of Work Supplied (LS)

Individual Labour Supply Curve

Individual Labour Supply (1)

Individual Labour Supply (2)

L1 L3 L2

The Supply of Labour

Wage Rate

Employment

LD2

LS

W2

E2

Wage Rate

LD1

E1

W1

An Outward Shift in Labour Demand when Labour Supply is Inelastic

An Outward Shift in Labour Demand when Labour Supply is Elastic

Employment

Labour Supply (short run)

W1

E2

D1

E1

W2

D2

Long Run Labour Supply

E3

a

b

W3c

The Supply of Labour

Wage Rate

Employment

Labour Supply (short run)

W1

E2

D1

E1

W2

D2

Long Run Labour Supply

E3

a

b

W3c

Natural Rate of Unemployment

Real Wage Rate

Employment

Labour Supply

Labour Force

Labour Demand

W1a b

E1 E2

Reducing the Natural Rate of Unemployment

Real Wage Rate

Employment

LS1

Labour Force

Labour Demand

W1a b

E1 E2

LS2

c

E3

Union Control of Labour Supply

Wage Rate

Employment

Labour Supply (union controlled)

E1E2

Labour Demand

W1

W2

Wage Rate

Employment

Labour Supply (union controlled)

E1E2

Labour Demand

Labour Supply to the Economy

W1

W2

Core Group of Workers

(Permanent Staff)

Short Term Contract Workers

Sub-Contracted

Work

Trainees on Government Employment

Projects

Agency Staff (Temp

Workers)

Workers with Job Share

Agreements

Flexible Employment Patterns

National Minimum Wage

Wage Rate (W)

Employment of Labour (E)

Demand = MRPL

Labour Supply

W min

Q1

W1

Minimum Wage (Wage Floor)

Q2Q3

Monopsony Buyer of Labour

Wage Rate

(W)


Demand = MRPL

Labour Supply (ACL)

Wq

Eq

Marginal Cost of Labour (MCL)

MRPL

Monopsony Buyer of Labour

Wage Rate

(W)


Demand = MRPL

Labour Supply (ACL)

W1

E2

Marginal Cost of Labour (MCL)

W2

E3

W3

E1

W4

E4

Monopsony Buyer of Labour with a NMW

Wage Rate

(W)


Demand = MRPL

Labour Supply (ACL)

Wq

Eq

MRPL

National Minimum Wage

Marginal Cost with NMW

NMW

E2

Price

Demand

P2

Q2

Price

Demand

P2

Q2

Economic Profit (Price > AC)

Monopoly and Profit Margins

AC AC

AC AC

Total Cost (AC x Output)

International Trade Diagrams

Freezers FreezersPPF FOR THE UK

International Trade and Production Possibility Frontiers

2000

PPF FOR ITALY

Dishwashers Dishwashers

1000

500 1000

1600

400200

Good Y Good Y

PPF FOR GERMANY


PPF FOR FRANCE

Good S Good S

1500

2000

1500

1500

Good W Good W

PPF FOR the UNITED STATES


PPF FOR CANADA

Good X Good X

250

1000

750

500

Freezers Freezers

PPF FOR THE UK


2000

PPF FOR ITALY

Dishwashers Dishwashers

1000

500 1000

1600

400200

3000

533

Import Tariffs

Price

Output (Q)

Domestic Demand

Domestic Supply

World Price

QdQs

Pw

World Price + Tariff

Qd2Qs2

M

Pw + T

ppfs and other diagrams

Documents