Economics Diagrams for the IB

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 (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