Diags Need
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THE BASIC DIAGRAMS YOU MUST BE ABLE TO DRAW (FULL SET) Aggregate supply and demand: determination of the level of national income
PRICE INDEX
PRICE INDEX
SAS
110.0
110.0
100.0
100.0
90.0
90.0 REAL GDP
0
0
PRICE INDEX
SAS
SAS
110.0 P1 100.0 AD
90.0
REAL GDP0
AD REAL GDP GDP1
AND be able to draw increases in SAS and both increases and decreases in AD PRICE INDEX
SAS1
SAS2
110.0 100.0 90.0 REAL GDP 0
PRICE INDEX
SAS1
110.0 100.0 AD2
90.0 AD1
REAL GDP GDP1 GDP2
PRICE INDEX
SAS1
110.0 100.0 AD1
90.0 AD2
REAL GDP GDP2 GDP1
K . Bucknall © 7th June, 2001
1
Determination of the rate of interest: Liquidity Preference RATE OF INTEREST Sm
r1
LP1 MONEY
0
Qm
AND increase in supply of money causing fall in interest rate (and decrease in Sm, rise in r) RATE OF INTEREST Sm1 Sm2
r1 r2
0
MONEY
Qm1 Qm2
Marginal efficiency of capital RATE OF INTEREST
r1
0
I1
MEC1 INVESTMENT
and effect of a lower (and higher) interest rate (analysis identical with normal D curve if price falls because S changed).
K . Bucknall © 7th June, 2001
2
RATE OF INTEREST
r1 r2 MEC1 INVESTMENT
0
I1 I2
and make sure you can put together the diagrams for the Bank of England altering the interest rate, causing change in investment, inducing a change in aggregate demand, thus resulting in a different level of GDP.
Microeconomic supply and demand: price equilibrium
price S
D P1
o
Q1 quantity
AND the increases and decreases in both curves, with the new equilibrium
Minimum and maximum price settings: amount now supplied: price S
D Set Price P1
o
quantity Q1 Qs
K . Bucknall © 7th June, 2001
3
amount now demanded (and surplus Qs-Qd):
price S
D Set Price P1
o
quantity Qd
Q1 Qs
Production function With diminishing marginal rate of substitution (bent line) Apples
A1
ppc1
O
B1
Bananas
Regular (straight line) Apples
A1
ppc1
O
B1
K . Bucknall © 7th June, 2001
Bananas
4
Comparative advantage (uses production function) Cars
6 5
Germany
4 3
2 1
Turkey
O
1
Rugs
2
When specialise and trade: total global output is greater so both can gain. If lines are parallel: neither has a comparative advantage, so no trade between those 2 countries. Foreign exchange rates: straight supply and demand diagrams
Price of pound in dollars D
S
P
0
Q
Quantity of pounds
You might find the supply curve is drawn vertically.
Wage equilibrium Demand for labour = marginal product curve:
K . Bucknall © 7th June, 2001
5
Marginal & Average Product
AP lab W1
MP lab 0
QL1
Q of Labour
Supply of labour: normal supply curve, labelled “S lab1”, “S lab2” etc.
Equilibrium wage: Wages
S lab
W1
D lab (MP lab) 0
Q lab
Quantity of labour
Increases and decreases in supply and demand work exactly like normal price S & D. Minimum and maximum wage setting works exactly like normal price S & D – usually minimum is asked about.
K . Bucknall © 7th June, 2001
6
Wages S lab Min wage
Min wage
W1
D lab 0
Q lab d Q lab1 Q lab s Quantity of labour
Economic rent: often seen in labour market but can be land or even capital. FIRST RATE SOCCER PLAYERS Wage S lab
CLERKS
W D lab Econ Rent
D lab S lab
Tr. Earn. 0
Qlab
Qlab (thous)
Basic cost curves: used as start of every diagram of firm in equilibrium Price, Costs
AC
0
K . Bucknall © 7th June, 2001
MC
Output
7
Monopoly: perhaps the most important for you to know! The starting place: identify MC=MR and set the quantity! Later read price off D (average revenue) curve, determine monopoly profit in equilibrium. Price, Costs
MC
AC
D Output
0
MR Price, Costs P
MC AC
AC
D 0
Output
Q MR
Imperfect competition Need to know long run equilibrium position is where demand curve (or average revenue) is tangential to AC (no surplus profit); but in short run diagram is that of a monopolist. Price, Costs AC MC P
D 0
Output
Q
MR
K . Bucknall © 7th June, 2001
8
Perfect competition: Costs and Price MC AC
Price
Output Output 0
Long run average cost curves (envelope curve) – economies of scale.
AVERAGE COSTS AC AC AC
0
K . Bucknall © 7th June, 2001
LRAC AC AC AC
TIME
9
Social and private costs: pollution imposes costs on society (firm producing too much)
Price
Social costs
Private costs
P2
P1
Demand Q2
0
Q1
Quantity
Polluter places costs on society by producing at Q1 and price P1. Better for society if produces less, at Q2 and at higher pirce P2.
Demographic transition: developing country population changes over time Birth rates & death rates
Birth rate
Death rate
0
time
Note that as the death rate plunges down, population increases rapidly. Once the birth rate has fallen sharply and levelled off, the difference between the two lines narrows again which means that population growth is no longer excessive. This is typical of what happens in many third world countries as they develop – as it happened earlier in what are now developed countries.
K . Bucknall © 7th June, 2001
10
PRICE INDEX
PRICE INDEX
SAS
110.0
110.0
100.0
100.0
90.0
90.0 REAL GDP
0
0
PRICE INDEX
SAS
SAS
110.0 P1 100.0 AD
90.0
REAL GDP0
AD REAL GDP GDP1
AND be able to draw increases in SAS and both increases and decreases in AD PRICE INDEX
SAS1
SAS2
110.0 100.0 90.0 REAL GDP 0
PRICE INDEX
SAS1
110.0 100.0 AD2
90.0 AD1
REAL GDP GDP1 GDP2
PRICE INDEX
SAS1
110.0 100.0 AD1
90.0 AD2
REAL GDP GDP2 GDP1
K . Bucknall © 7th June, 2001
1
Determination of the rate of interest: Liquidity Preference RATE OF INTEREST Sm
r1
LP1 MONEY
0
Qm
AND increase in supply of money causing fall in interest rate (and decrease in Sm, rise in r) RATE OF INTEREST Sm1 Sm2
r1 r2
0
MONEY
Qm1 Qm2
Marginal efficiency of capital RATE OF INTEREST
r1
0
I1
MEC1 INVESTMENT
and effect of a lower (and higher) interest rate (analysis identical with normal D curve if price falls because S changed).
K . Bucknall © 7th June, 2001
2
RATE OF INTEREST
r1 r2 MEC1 INVESTMENT
0
I1 I2
and make sure you can put together the diagrams for the Bank of England altering the interest rate, causing change in investment, inducing a change in aggregate demand, thus resulting in a different level of GDP.
Microeconomic supply and demand: price equilibrium
price S
D P1
o
Q1 quantity
AND the increases and decreases in both curves, with the new equilibrium
Minimum and maximum price settings: amount now supplied: price S
D Set Price P1
o
quantity Q1 Qs
K . Bucknall © 7th June, 2001
3
amount now demanded (and surplus Qs-Qd):
price S
D Set Price P1
o
quantity Qd
Q1 Qs
Production function With diminishing marginal rate of substitution (bent line) Apples
A1
ppc1
O
B1
Bananas
Regular (straight line) Apples
A1
ppc1
O
B1
K . Bucknall © 7th June, 2001
Bananas
4
Comparative advantage (uses production function) Cars
6 5
Germany
4 3
2 1
Turkey
O
1
Rugs
2
When specialise and trade: total global output is greater so both can gain. If lines are parallel: neither has a comparative advantage, so no trade between those 2 countries. Foreign exchange rates: straight supply and demand diagrams
Price of pound in dollars D
S
P
0
Q
Quantity of pounds
You might find the supply curve is drawn vertically.
Wage equilibrium Demand for labour = marginal product curve:
K . Bucknall © 7th June, 2001
5
Marginal & Average Product
AP lab W1
MP lab 0
QL1
Q of Labour
Supply of labour: normal supply curve, labelled “S lab1”, “S lab2” etc.
Equilibrium wage: Wages
S lab
W1
D lab (MP lab) 0
Q lab
Quantity of labour
Increases and decreases in supply and demand work exactly like normal price S & D. Minimum and maximum wage setting works exactly like normal price S & D – usually minimum is asked about.
K . Bucknall © 7th June, 2001
6
Wages S lab Min wage
Min wage
W1
D lab 0
Q lab d Q lab1 Q lab s Quantity of labour
Economic rent: often seen in labour market but can be land or even capital. FIRST RATE SOCCER PLAYERS Wage S lab
CLERKS
W D lab Econ Rent
D lab S lab
Tr. Earn. 0
Qlab
Qlab (thous)
Basic cost curves: used as start of every diagram of firm in equilibrium Price, Costs
AC
0
K . Bucknall © 7th June, 2001
MC
Output
7
Monopoly: perhaps the most important for you to know! The starting place: identify MC=MR and set the quantity! Later read price off D (average revenue) curve, determine monopoly profit in equilibrium. Price, Costs
MC
AC
D Output
0
MR Price, Costs P
MC AC
AC
D 0
Output
Q MR
Imperfect competition Need to know long run equilibrium position is where demand curve (or average revenue) is tangential to AC (no surplus profit); but in short run diagram is that of a monopolist. Price, Costs AC MC P
D 0
Output
Q
MR
K . Bucknall © 7th June, 2001
8
Perfect competition: Costs and Price MC AC
Price
Output Output 0
Long run average cost curves (envelope curve) – economies of scale.
AVERAGE COSTS AC AC AC
0
K . Bucknall © 7th June, 2001
LRAC AC AC AC
TIME
9
Social and private costs: pollution imposes costs on society (firm producing too much)
Price
Social costs
Private costs
P2
P1
Demand Q2
0
Q1
Quantity
Polluter places costs on society by producing at Q1 and price P1. Better for society if produces less, at Q2 and at higher pirce P2.
Demographic transition: developing country population changes over time Birth rates & death rates
Birth rate
Death rate
0
time
Note that as the death rate plunges down, population increases rapidly. Once the birth rate has fallen sharply and levelled off, the difference between the two lines narrows again which means that population growth is no longer excessive. This is typical of what happens in many third world countries as they develop – as it happened earlier in what are now developed countries.
K . Bucknall © 7th June, 2001
10
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