Important diagrams to remember 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 ($) 5 5 5 4 4 + 3 + 3 2 2 1 DA 1 0 2 4 6 8 10 12 quantity of chocolate bars (per week) 0 demands of other consumers in the market 4 = 3 2 1 DB 0 2 4 6 8 10 12 quantity of chocolate bars (per week) Dm 2 4 6 8 10 12 14 quantity of chocolate bars (thousands per week) Figure 2.2 Market demand as the sum of individual demands (a) A movement along the demand curve, caused by a change in price, is called a ‘change in quantity demanded’ (b) A shift of a demand curve, caused by a change in a determinant of demand, is called a ‘change in demand’ P P change in demand P1 A change in quantity demanded decrease in D B P2 D2 D 0 increase in D Q1 Q2 D3 Q 0 D1 Q Figure 2.4 Movements along and shifts of the demand curve © Cambridge University Press 2012 Economics for the IB Diploma 1 (a) Supply of firm A (b) Supply of firm B (c) Market supply price of chocolate bars ($) Important diagrams to remember 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 ($) Figure 2.8 Movements along and shifts of the supply curve S 5 surplus 4 3 equilibrium price market equilibrium 2 shortage 1 D equilibrium quantity 0 2 4 6 8 10 12 quantity of chocolate bars (thousands per week) 14 Figure 2.9 Market equilibrium © Cambridge University Press 2012 Economics for the IB Diploma 2 Important diagrams to remember (a) Increase in demand P (b) Decrease in demand initial equilibrium c P2 a S P final equilibrium P1 b D2 P1 final equilibrium S a c P3 D1 D1 0 Q1 initial equilibrium b D3 Q2 0 Q Q3 Q1 Q Figure 2.10 Changes in demand and the new equilibrium price and quantity (a) Increase in supply (b) Decrease in supply initial equilibrium final equilibrium S1 P a P1 c P2 P S2 b S3 final equilibrium P1 S1 c P3 a b D 0 Q2 Q1 initial equilibrium D 0 Q Q3 Q1 Q Figure 2.11 Changes in supply and the new equilibrium price and quantity (a) Adjustment of price to increased demand P S C P2 P1 A B D2 D1 0 Q1 Q3 Figure 2.16 Price as a signal and incentive © Cambridge University Press 2012 shortage = excess demand Q2 Q P1 S = MC P2 P3 consumer surplus Pe producer surplus P4 P5 Allocative efficiency: at market equilibrium MB = MC and social surplus is maximum D = MB P6 0 Qa Qb Qe Q Figure 2.17 Consumer and producer surplus in a competitive market Economics for the IB Diploma 3 Important diagrams to remember Higher level topic P ($) 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($) Qs = –1 + 2P Qs = 2 + 2P Qs = 6 + 2P 5 4 4 3 3 c decreases c increases 2 2 1 1 0 2 4 6 8 10 12 14 16 18 quantity of chocolate bars (thousands per week) Figure 2.14 Shifts of the supply curve (changes in c in the supply function Qs = c + dP ) © Cambridge University Press 2012 Qs = 2 + 2P value of d increases Qs = 2 + 4P 0 2 4 6 8 10 12 14 16 18 quantity of chocolate bars (thousands per week) Figure 2.15 Changing the slope of the supply curve (changes in d in the function Qs = c + dP ) Economics for the IB Diploma 4 Important diagrams to remember Chapter 3 Elasticities Frequently encountered cases (a) Price inelastic demand: 0 < PED <1 (b) Price elastic demand: 1 < PED < ∞ P P 5% P2 P2 P1 10% P1 D D 0 Q2 Q1 0 Q 5% P (d) Perfectly inelastic demand: PED = 0 (e) Pefectly elastic demand: PED = ∞ P P D P1 P2 5% P1 Q 10% Special cases (c) Unit elastic demand: PED = 1 Q2 Q1 D D 0 Q2 Q1 Q 0 Q1 Q 0 Q 5% Figure 3.1 Demand curves and PED P ($) 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 Economics for the IB Diploma 5 Important diagrams to remember (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 Economics for the IB Diploma 6 Important diagrams to remember (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 Economics for the IB Diploma 7 Important diagrams to remember (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 remember 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 remember 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 remember 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 remember 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 remember 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 remember (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 remember (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 15 Important diagrams to remember 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 remember 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 remember (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 remember 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 remember 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 remember 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 remember (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 remember (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 remember 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 remember 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 remember 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 remember 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 Economics for the IB Diploma 27 Important diagrams to remember 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 remember (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 Economics for the IB Diploma 29 Important diagrams to remember (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 remember (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 remember 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 remember 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 remember Higher level topic (b) The reasoning behind SRAS shifts in terms 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 terms 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 remember 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 remember 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 remember (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 remember (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 remember (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 remember Chapter 14 Exchange rates and the balance of payments (a) Demand for $ increases: $ appreciates per $ = price of $ in terms of per $ = price of $ in terms 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 terms 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 terms of $ (euros) Q of boples D1 for boples $ per bople = price of boples in terms of $ $ per = price of in terms 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 remember (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 remember Chapter 15 Economic integration and the terms 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 terms of trade changes on the balance of trade depend on PEDs for exports and imports (a) Changes in global demand: terms 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: terms 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 remember 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 1