12 Key Diagrams for as Economics

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12 Key Diagramsfor AS Microeconomics

Advice on drawing diagrams in the exam

The right size is about 1/3 of a side of A4 dont make them too small

Avoid wrapping text around the diagram

Avoid directional arrows label each curve clearly so that it is clear which curves are shifting

Remember to label both the x and the y axis

Always draw dotted lines to the x and y axis to show changing prices, quantities etc.

Draw in pencil


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(1) The Production Possibility Frontier (PPF)

A PPF shows the different combinations of goods and services that can be

produced with a given amount of resources in their most efficient way

Any point inside the curve suggests resources are not being utilised efficiently

Any point outside the curve not attainable with the current level of resources

An outward shift of the PPF implies that an economy has achieved economic

growth

OUTPUTOF GOOD

Y

DC

A

X

B

PPF1 PPF2

OUTPUT OF GOOD X

Point X is an allocative inefficient combination it lies within the PPF

Points, C, A and B are all allocatively efficient

D is unattainable unless there is an outward shift if the PPF

tutor2u : 12 Key Diagrams for AS Economics (Microeconomics)


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(2) The Effects of an Indirect Tax on Producers and Consumers

Ain direct tax increases the costs faced by producers. The amount of the tax is shown

by the vertical distance between the two supply curves. Because of the tax, less can be

supplied at each price level. The result is an increase in the equilibrium market price

and a contraction in market demand to a new e uilibrium out ut of 2

Price

Quantity

Demand

Supplypost-tax Supply pre-tax

P2

Q2

P1

Tax per unit

P3

Q1

P2 is the price paid by consumers after the introduction of the tax

P2-P3 is the tax per unit received by the government

(P2-P3) x Q2 is the total tax revenue received by the government

The producer keeps price P3 after the tax has been paid

The consumer pays P2-P1 of the tax

The producer pays P1-P3 of the tax

The effect of the tax depends on the price elasticity of demand & supply for the good



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3) A Government Subsidy to Producers

A government subsidy encourages an increase in supply at each price level because the

subsidy provides a reduction in a firms costs of production. The extent of the subsidy

per unit is shown by the vertical distance between the two supply curves.

S1Price

Quantity

Demand

P1

Q1

P2

Supply +Subsidy

P3

Subsidy per unit

Q2

The price before the subsidy is offer is P1 and the equilibrium quantity is Q1

Following the subsidy, the price falls to P2 (this is the price paid by consumers)

Output rises to Q2 i.e. the lower price has encouraged an expansion of demand

The producer then receives the subsidy P2-P3 and received price P3

Total government spending on the subsidy equals Q2 x (P2P3)

Once again, the elasticities of demand and supply affect how a subsidy causes changes

in price and quantity in the market

Most students forget to show the subsidy payment to producers in their diagrams!

Governments may use subsidies for a variety of reasons including reducing the price

and increasing the consumption of merit goods check your notes on subsidies for the

arguments for and against government subsidies for producers



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4) Drawing shifts in demand and supply and their effects on market price

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

Price

Quantity

D1

S1

P1

Q1

Price

Quantity

D1

S1

P1

Q1

D3

Q2

P3

D2

Q2

P2

S2

S2

When drawing price theory diagrams

Avoid any use of arrows clear labelling does that job for you!

Always draw to the axis to show prices and quantities

It is often a good idea to draw two diagrams in the latter parts of questions this allows you to change the elasticities of demand and supply and see how

this changes your analysis

Shifts in demand do not normally cause a shift in supply

Likewise shifts in supply cause movements along the demand curve and notshifts in the demand curve

Inelastic demand and supply curves mean that equilibrium prices tend to bevolatile when conditions of demand and supply change

Think about the implications of such shifts in price and quantity on theincomes of producers applying the concept of price elasticity of demand is

often very helpful when discussing the incomes and profits of suppliers



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5) Economies of large scale production

Economies of scale are the advantages of large scale production that result in lower unit

(average) costs (cost per unit)

Costs

Output (Q)Q1 Q2 Q3

AC1

AC2

AC3

Long run averagecost

Demand

Economies of scale lead to a fall in the long run average cost curve

It is more cost efficient to produce output Q2 at an AC of AC2 than it is to produce Q1

Q3 is the output where the economies of scale have been fully exploited

This is known as the output of productive efficiency in the long run

Depending on the elasticity of the demand curve, output Q3 gives higher total profits at

output Q2 and the consumer also benefits from lower prices

Economies of scale therefore increase both consumer and producer surplus

Important when discussing the economics of large scale production and also the potential

costs and benefits of monopoly power in a market

Make sure you have examples of the different types of economy of scale that a business can

ex loit



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6) Consumer and producer surplus and allocative efficiency in a market

CostsRevenues Supply

Consumer

Surplus (CS)

Output (Q)

Demand

ConsumerSurplus (CS)

P1

ProducerSurplus (PS)

ProducerSurplus

Allocative efficiency isachieved here where themarket clears and the pricereflects the costs of supply.Consumer and producer

surplus is maximised!

Q1

Supply

CS

Demand

P1

Q1

ProducerSurplus

P2

ProducerSurplus

If output is reduced to Q2and the price is raised to P2,then there is a loss ofallocative efficiency leading to a deadweight lossof consumer and producesur lus

Q2

Allocative efficiency occurs when the market clears at a price when the price charged to

consumers reflects the true cost of factors of production used in supplying the product



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7) Market failure when there are negative externalities

Social Cost

Output (Q)

Demand = PrivateBenefit = Social Benefit

Private Cost(Supply)

Price

P2

P1

Q1Q2

ExternalCost

When there are negativeproduction externalities thenthe social cost of supplying

the product is greater thanthe private costThe product is over-suppliedand under-priced by the

market i.e. market failure

Demand = PrivateBenefit

Private Cost = Social CostPrice

Q1Q2

P1

P2

When there are negativeconsumption externalitiesthen the social benefit ofconsuming the product isless than the private benefit- The product is over-consumed by the market i.e. market failure

Social Benefit

Output (Q)



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8) Price elasticity of demand two important applications

(i) Price elasticity of demand and the total revenue to a supplier

Relatively Inelastic Demand

Price Price

P2

P1

P1

P2

(ii) Price elasticity of demand and the profit margins of a business

Price

Demand

P2

P1

Q2 Q1

Price

Demand

P2

P1

Q2 Q1

Relatively Inelastic Demand Relatively Elastic Demand

AC

AC

Higher profit

mar in

Lower profit

mar in

Demand

Relatively Elastic Demand

Demand

Q2 Q1 Q1 Q2



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9) Merit Goods positive externalities

Merit goods could be provided by the market but consumers may not be able to

afford or feel the need to purchase thus the free-market economy would notprovide them in the quantities society needs

Costs

Benefits

Output (Q)

Private

Benefit

Supply

SocialBenefit

Welfare loss because merit goods

tend to be under-consumed by the

free marketA

Qp Qs

External BenefitC

B



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10) Market failure due to information failure

Market failure with demerit goods the free market may fail to take into account the

negative externalities of consumption (because the social cost > private cost).

Consumers too may experience imperfect information about the long term costs to

themselves of consuming products deemed to be de-merit goods

CostsBenefits

Social Cost

Quantity

Demand (Limited Information)

Private Cost

Q1

External costs (negativeexternalities)

Demand (Full Information)

Q2Q3

The social optimal level of consumption would be Q3 an output that takes into account the

information failure of consumers and also the negative externalities.



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11) Maximum and minimum prices when governments intervene in a market

Rent

s

Quantity of Rented Property

Demand

Supply

P max

Q1

Pe

Price (Rent) Ceiling

Q2

Free MarketEquilibrium

A maximum price for rented accommodation or for a foodstuff

ExcessDemand

A minimum wage in the labour market

Wages

Supply ofLabour

Minimum WageW1

We

Demand forLabour

Ee E2E2 Employment of Labour



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12) Buffer stock schemes to support prices and incomes in a market

Buffer stock schemes seek to stabilize the market price of agricultural products by buying

up supplies of the product when harvests are plentiful and selling stocks of the product

onto the market when supplies are low

Supply S2

Price

Quantity

Demand

P min

Q1

Pe

Price Floor (Guaranteed)

Q3 Q4

The government offers a guaranteed minimum price (P min) to farmers of wheat. The price

floor is set above the normal free market equilibrium price.

If the government is to maintain the guaranteed price at P min, then it must buy up the

excess supply (Q3-Q1) and put these purchases into intervention storage. Should there be a

large rise in supply putting downward pressure on the free market equilibrium price. In this

situation, the government will have to intervene once more in the market and buy up the

surplus stock of wheat to prevent the price from falling.


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12 Key Diagrams for as Economics