ppfs and other diagrams
DESCRIPTION
PPFs and Other Diagrams. C. A. Output of consume r goods and services. B. Output of capital goods. C. Al l Other Operations. A. B. Heart Operations. Costs Revenues. SAC1. SAC2. AR (Demand). Output (Q). Basic Supply and Demand Analysis. Demand Curve. Price. P2. P1. P3. Demand. - PowerPoint PPT PresentationTRANSCRIPT
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
Quantity Quantity Q1Q2 Q3
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
Quantity Quantity Q1Q2 Q3
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
Negative 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
Quantity of Output (Q)
Demand (Private Marginal Benefit) =
Social Marginal Benefit (SMB)
Marginal Private Cost
P1
Q1
Social Equilibrium
Loss of Social Welfare from Externalities
Marginal Social Cost
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
The Demand Curve for Public Goods
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
Marginal Social Cost
(MSC)
Qp
Negative Externalities
CostsBenefits
Output (Q)
PMB = SMB
PMC
SMC
QpQs
External Cost
Net Welfare Loss
Marginal External Cost
Negative Externalities – Pollution Tax
CostsBenefits
Output (Q)
PMB = SMB
PMC
SMC
QpQs
PMC + TAX
Price
Quantity
Demand (Limited Information)
Marginal Private Cost
P1
Q1
De-Merit Goods and Health Awareness
Marginal Social Cost
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
Monopoly Demand (AR)
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
Monopoly Demand (AR)
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)
Monopoly Demand (AR)
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)
Total Cost (TC)RevenueCost and
Profit
Q1 Q2
Total Revenue (TR)
Break Even TR=TC
Total Revenue and Cost under Perfect Competition
Output (Q)
Total Cost (TC)RevenueCost and
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
Profit Max at Price 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
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)
Quantity of Output (Q)
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
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 = MR
MC
AC
AC1
Q2
Perfect Competition (2) Increase in Market Supply
Output (Q)Output (Q)
Market Demand and Supply Individual Firm’s Costs and Revenues
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)
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 consumer surplus
Net loss of producer surplus
A
B
C
D
Pure Monopoly and Scale Economies
Output (Q)
Competitive Market Pure Monopoly
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
Profit Max at Price P1
P2
AC2
Q2
Profit Max at Price P2
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
Quantity of Output (Q)
Demand (Private Marginal Benefit) =
Social Marginal Benefit (SMB)
Marginal Private Cost
P1
Q1
Social Equilibrium
Loss of Social Welfare from Externalities
Marginal Social Cost
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
The Demand Curve for Public Goods
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
Marginal Social Cost
(MSC)
Qp
Negative Externalities
CostsBenefits
Output (Q)
PMB = SMB
PMC
SMC
QpQs
External Cost
Net Welfare Loss
Marginal External Cost
Negative Externalities – Pollution Tax
CostsBenefits
Output (Q)
PMB = SMB
PMC
SMC
QpQs
PMC + TAX
Price
Quantity
Demand (Limited Information)
Marginal Private Cost
P1
Q1
De-Merit Goods and Health Awareness
Marginal Social Cost
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
Real National Income
AD
Aggregate Demand and Supply
A
B
P1
P2
Y1 Y2
SRAS2
SRAS2
General Price Level
National Income
AD
SRAS
Pe
Ye
Aggregate Demand and Supply
LRAS
Yfc
General Price Level
National Income
AD1
SRAS
Pe
Ye
Negative Output Gap
LRAS
Yfc
AD2
Y2
P2
General Price Level
Real National Income
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
Real National Income
An Increase in Long Run Aggregate Supply
LRAS1 LRAS2
YFC2YFC1
SRAS1
SRAS2
General Price Level
National Income
AD
SRAS1
P1
Y1
Aggregate Demand and Supply
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
Real National Income
AD1
SRAS
P1
Y1
The Risk of Demand Pull Inflation
LRAS
Yfc
AD2
P2
Y2
AD3
P3
General Price Level
Real National Income
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)
Employment of Labour (E)
Demand = MRPL
Labour Supply (ACL)
Wq
Eq
Marginal Cost of Labour (MCL)
MRPL
Monopsony Buyer of Labour
Wage Rate
(W)
Employment of Labour (E)
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)
Employment of Labour (E)
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
International Trade and Production Possibility Frontiers
PPF FOR FRANCE
Good S Good S
1500
2000
1500
1500
Good W Good W
PPF FOR the UNITED STATES
International Trade and Production Possibility Frontiers
PPF FOR CANADA
Good X Good X
250
1000
750
500
Freezers Freezers
PPF FOR THE UK
International Trade and Production Possibility Frontiers
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