Good X Production Possibility Frontier (Line) Trade-Offs X1 a X2 b c X3 PPF 0 Y1 Y2 Y3 Good Y Good X Production Possibility Frontier (Curve) Efficient and Inefficient Production d X1 a e X2 b X3 c PPF 0 Y1 Y2 Y3 Good Y Good X Production Possibility Frontier (Curve) Market Growth & Contraction X1 X2 X3 PPF3 0 Y3 PPF1 Y1 PPF2 Y2 Good Y Good X Production Possibility Frontier (Curve) Productivity Improves X1 X2 PPF1 0 Y1 PPF2 Y2 Good Y Price Change in Quantity Demanded S p1 b a pe p2 c D 0 q1 qe q2 Quantity Price Change in Quantity Supplied S p1 b a pe p2 c D 0 q2 qe q1 Quantity Price Shifts in Demand S p1 b a pe p2 D1 c D D2 0 q2 qe q1 Quantity Price Price Elasticity of Demand D1 p1 infinitely elastic PϵD ∞ D2 D5 perfectly inelastic PϵD is 0 D4 Inelastic PϵD is more than 0 and less than 1 elastic PϵD is more than 1 D3 unit elastic PϵD is ±1 0 Quantity Price Shifts in Supply S2 S S1 p2 c a pe p1 b D 0 q2 qe q1 Quantity Price Shift in Market Demand SSR p1 pe surplus p2 D D1 0 q2 q1 q e Quantity Price Market Controls (Minimum price) S pmin price floor a surplus pe deadweight loss 0 D qd qe qs Quantity Price Market Controls (Maximum price) S pe pmax price ceiling shortage a deadweight loss 0 D qs qe qd Quantity Price Inelastic Demand & Revenue ∆P > ∆Q TR increases p2 p1 Revenue gained revenue lost D 0 q2 q1 Quantity Price Consumer Surplus S2 S1 consumer surplus p2 p1 D 0 q2 q1 Quantity Price Negative Externalities of Production External Costs MSC external cost MPC P2 b a pm welfare loss from increasing productivity 0 q2 D = MSB = MPB qm Quantity Price Positive Externalities of Consumption External Benefits S = MPC = MSC b P2 pm welfare gain from increasing consumption a MSB external benefit 0 D = MPB qm q2 Quantity Price Positive Externalities of Consumption MSC external cost MPC P2 b a pm welfare loss 0 q2 D qm Quantity Perfect Market Maximisation of Profit (Short Run Equilibrium) FIRM $ Price $ INDUSTRY MC S ATC supernormal profit Pe AR1 ATC1 a AR1 = MR1 = D1 b D1 0 0 Quantity (Millions) q1* Quantity (Thousands) Maximisation of Revenue FIRM $ Total Revenue FIRM MC ATC Pe AR AR = MR = D b TR MR 0 qe * 0 Quantity (Millions) qe * Quantity (Thousands) Perfect Market Minimisation of Loss (Short Run Equilibrium) FIRM $ Price $ INDUSTRY MC S ATC AVC P1 AR1 ATC1 a AR1 = MR1 = D1 loss b D1 P2 AR2 D2 c AR2 = MR2 = D2 Shut down point 0 0 Quantity (Millions) q1* Quantity (Thousands) Perfect Market Maximisation of Profit (Long Run Equilibrium) $ FIRM SR.MC SR.ATC LR.ATC AR=MR=D AR 0 q1* Quantity (Thousands) Price Monopoly Profit Maximisation (Short Run) MC ATC supernormal profit P1 P2 b breakeven a AR=D MR 0 q1 q2 Quantity Monopoly Allocatively and productively inefficient PERFECT COMPETITION Price MONOPOLY MC S ATC consumer surplus Pmon consumer surplus deadweight loss Pe Ppc producer surplus producer surplus AR=D D MR 0 qmon qpc qe Quantity Monopolistic Firm Profit Maximiser Price MC PSR LONG RUN Price Price SHORT RUN MC ATC ATC normal profit ARSR=DSR PLR supernormal profit deadweight loss MRLR MRSR 0 qe 0 Quantity qe ARLR=DLR Monopolistic Firm Loss Minimiser MC normal profit Price ATC LONG RUN Price Price SHORT RUN MC Pe AVC PSR loss ARSR=DSR ARSR=DSR deadweight loss MRSR 0 qsr MRSR 0 Quantity qe Oligopoly Kinked Demand Curve FIRM $ Price $ FIRM PϵD > 0 and < 1 Elastic PϵD =0 perfectly inelastic a P MC1 P1 b P PϵD (>1) Inelastic MR1 a c P2 b D1 0 MC2 If MC is anywhere between MC1 and MC2 profit is maximised at Q AR=D 0 q Quantity (Millions) q1 q q2 MR2 Quantity (Thousands) National Output (GDP) Hypothetical Business Cycle Full Capacity Output Positive output Gap Trend Output Peak Actual Output Slow Down Recovery Expansion Recession/Slump Negative output Gap 0 Time The Circular Flow of Income WITHDRAWALS FIRMS Goods and Services Consumer Expenditure Wages, Rent, Dividends Factors of Production Government Expenditure (G) Export Expenditure (X) BANKS GOVERNMENT INJECTIONS HOUSEHOLDS Investment (I) Net Saving (S) Net Taxes (T) Import Expenditure (M) Singapore Business Cycle National Output (GDP) Singapore GDP Annual Growth Rate Peak Boom (Rapid Economic Growth) 4. Slow Down Recovery Recession Recession Recession Recession/ Slump Recession Time A recessionary gap LRAS a P1 P2 AS1 Recessionary Gap PHILIPS CURVE Inflation % Price Level $ AGGREGATE SUPPLY AND DEMAND LRPC a P1 b b P2 AD1 AD2 SRPC1 0 Y2 0 Y1 GDP $ UN U1 U2 Unemployment Expansionary Policies Correcting a recessionary gap Inflation % PHILIPS CURVE LRPC a P1 P2 b P3 c SRPC1 SRPC2 0 UN U1 U2 Unemployment Expansionary Policies Correcting a recessionary gap LRAS AS1 AS2 a P1 BUSINESS CYCLE National Output (GDP) Price Level $ AGGREGATE SUPPLY AND DEMAND AR1 Full Capacity Output Positive output Gap c Peak Slow Down P2 c P3 AD1 Y2 Expansion b Actual Output Recovery Recession/Slump AR2 AD2 0 a ATC1 b Trend Output Negative output Gap 0 Y1 GDP $ Time