Cambridge University Press 2012 Economics for the IB Diploma 1

Important diagrams to remember

Chapter 2 Competitive markets: demand and supply
0
1
2
3
4
5
2 4 6 8 10 12
quantity of chocolate
bars (per week)
p
r
i
c
e

o
f

c
h
o
c
o
l
a
t
e

b
a
r
s

(
$
)
D
A
0
1
2
3
4
5
2 4 6 8 10 12
quantity of chocolate
bars (per week)
D
B
+ +
demands
of other
consumers
in the
market
0
1
2
3
4
5
2 4 6 8 10 12 14
quantity of chocolate bars
(thousands per week)
D
m
=
P ($) P ($)
(a) Demand of consumer A (b) Demand curve of consumer B (c) Market demand
Figure 2.2 Market demand as the sum of individual demands
Figure 2.4 Movements along and shifts of the demand curve
P
P
1
0
P
2
Q
1
Q
2
Q
A
B
D
change in
quantity
demanded
(a) A movement along the demand curve,
caused by a change in price, is called a
change in quantity demanded
P
0 Q
D
3
D
1
D
2
change in demand
decrease
in D
increase
in D
(b) A shift of a demand curve, caused by a change in
a determinant of demand, is called a change in
demand
Cambridge University Press 2012 Economics for the IB Diploma 2
Important diagrams to remember
Figure 2.9 Market equilibrium
0
1
2
3
4
5
2 4 6 8 10 12 14
quantity of chocolate bars
(thousands per week)
p
r
i
c
e

o
f

c
h
o
c
o
l
a
t
e

b
a
r
s

(
$
)
equilibrium
price
market equilibrium
surplus
equilibrium quantity
S
D
shortage
Figure 2.6 Market supply as the sum of individual supplies
0
1
2
3
4
5
200 400 600
quantity of chocolate
bars (per week)
p
r
i
c
e

o
f

c
h
o
c
o
l
a
t
e

b
a
r
s

(
$
)
S
A
0
1
2
3
4
5
200 400 600
quantity of chocolate
bars (per week)
S
B
+ +
supplies
of other
firms in
the market
0
1
2
3
4
5
2 4 6 8 10 12
quantity of chocolate
bars (thousands per week)
S
m
=
P$ P$
(a) Supply of rm A (b) Supply of rm B (c) Market supply
Figure 2.8 Movements along and shifts of the supply curve
0
P
1
P
Q
1
Q
2
Q
S
A
B
P
2
change in
quantity
supplied
(a) A movement along the supply curve,
caused by a change in price, is called a
change in quantity suppied
0
P
1
P
Q
3
Q
1
Q
2
Q
S
3
S
1
S
2
decrease
in supply
increase
in supply
(b) A shift of the supply curve, caused by a
change in a determinant of supply, is called a
change in supply
Cambridge University Press 2012 Economics for the IB Diploma 3
Important diagrams to remember
(a) Increase in demand (b) Decrease in demand
0
a
a
b
c
c
b
P
1
P
Q
1
Q
2
Q
P
2
S
D
2
D
1
initial
equilibrium
final
equilibrium
0
P
3
P
Q
3
Q
1
Q
P
1
S
D
1
D
3
final
equilibrium
initial
equilibrium
Figure 2.10 Changes in demand and the new equilibrium price and quantity
Figure 2.11 Changes in supply and the new equilibrium price and quantity
0
P
1
P
Q
1
Q
2
Q
P
2
S
1
D
initial
equilibrium
a b
c
final
equilibrium
S
2
(a) Increase in supply
a
b
c
0
P
3
P
Q
3
Q
1
Q
P
1
S
3
D
final
equilibrium
initial
equilibrium
S
1
(b) Decrease in supply
Figure 2.17 Consumer and producer surplus in a competitive market
0
P
1
Q
a
Q
b
Q
P
2
Q
e
D = MB
P
3
P
e
P
4
P
5
P
6
S = MC
Allocative
efficiency:
at market
equilibrium
MB = MC and
social surplus
is maximum
producer
surplus
consumer
surplus
Figure 2.16 Price as a signal and incentive
0
P
1
P
Q
1
Q
3
Q
P
2
D
1
Q
2
S
C
D
2
A
B
shortage =
excess demand
(a) Adjustment of price to increased demand
Cambridge University Press 2012 Economics for the IB Diploma 4
Important diagrams to remember
Figure 2.12 Shifts of the demand curve (changes in a in the
function Q
d
= a bP )
0
1
2
3
4
5
2 4 6 8 10 12 14 16 18 20
quantity of chocolate bars (thousands per week)
Q
d
= 14 2P
Q
d
= 10 2P
Q
d
= 19 2P
decreases
a a
increases
P ($)
Figure 2.13 Changing the slope of the demand curve (changes in b in the
function Q
d
= a bP )
0
1
2
3
4
5
Q
d
= 14 4P
Q
d
= 14 2P
absolute
value of b
increases
2 4 6 8 10 12 14 16 18 20
quantity of chocolate bars (thousands per week)
P ($)
0
1
2
c c
3
4
5
Q
s
= 2 + 2P Q
s
= 1 + 2P Q
s
= 6 + 2P
increases
2 4 6 8 10 12 14 16 18
quantity of chocolate bars (thousands per week)
decreases
P ($)
Figure 2.14 Shifts of the supply curve (changes in c in the supply
function Q
s
= c + dP )
Figure 2.15 Changing the slope of the supply curve (changes in d in the
function Q
s
= c + dP )
0
1
2
3
4
5
Q
s
= 2 + 2P
Q
s
= 2 + 4P
value
of d
increases
2 4 6 8 10 12 14 16 18
quantity of chocolate bars (thousands per week)
P($)
Higher level topic
Cambridge University Press 2012 Economics for the IB Diploma 5
Important diagrams to remember
Chapter 3 Elasticities
Figure 3.1 Demand curves and PED
0
P
Q
P
2
P
1
Q
1
Q
2
D
10%
5%
0
P
Q
P
2
P
1
Q
1
Q
2
D
5%
10%
0
P
Q
P
2
P
1
Q
1
Q
2
D
5%
5%
0
P
Q Q
1
D
0
P
Q
P
1
D
(a) Price inelastic demand: 0 < PED <1 (b) Price elastic demand: 1 < PED <
(c) Unit elastic demand: PED = 1 (d) Perfectly inelastic demand: PED = 0 (e) Pefectly elastic demand: PED =
Frequently encountered cases
Special cases
0
5
10
15
20
25
30
35
40
10 20 30 40 50 60 70 80
units of good A
45
50
90 100
f
e
d
c
b
a
PED = 4
PED = 1
PED = 0.25
elastic portion of
demand curve
inelastic portion
of demand curve
P ($)
Figure 3.2 Variability of PED along a straight-line demand curve
Cambridge University Press 2012 Economics for the IB Diploma 6
Important diagrams to remember
Figure 3.6 Price uctuations are larger for primary commodities because of low PED
0
P
Q
P
1
P
3
Q
2
S
1
S
2
S
3
D
Q
1
Q
3
P
2
(a) Primary commodities: supply shifts with inelastic demand
0
P
Q
P
1
P
3
Q
2
S
1
S
2
S
3
D
Q
1
Q
3
P
2
(b) Manufactured products: supply shifts with elastic demand
0
P
Q
P
t
P
1
Q
t
D
initial
equilibrium
final
equilibrium
S
2
S
1
tax
per
unit
(a) Inelastic demand
(b) Elastic demand
0
P
Q
P
t
P
1
Q
t
D
initial
equilibrium
final
equilibrium
S
2
S
1
tax
per
unit
Figure 3.7 PED, indirect taxes and government tax revenue
0
P
Q
P
2
P
1
Q
1
Q
2
D
PED > 1
PED < 1
PED = 1
0
P
Q
P
2
P
1
Q
1
Q
2
D
PED > 1
PED < 1
PED = 1
A B
C
A B
C
0
P
Q
P
2
P
1
Q
1
Q
2
D
A B
C
(a) PED > 1 (elastic demand) (b) PED < 1 (inelastic demand) (c) PED = 1 (unit elastic demand)
Figure 3.5 PED and total revenue
Cambridge University Press 2012 Economics for the IB Diploma 7
Important diagrams to remember
(a) Substitutes and positive XED : demand for Pepsi

0
P
Q
D
2
S
D
1
D
3
D increases
as price of
tennis rackets
decreases
D increases
as price of
Coca-Cola
increases
D decreases as price
of Coca-Coladecreases
0
P
Q
D
2
S
D
1
D
3 D decreases as
price of tennis rackets increases
(b) Complements and XED : demand for tennis balls
Figure 3.8 Cross-price elasticities
0
P
Q
D
2
D
1
D
3
D
4
YED > 1
income
elastic
demand,
normal
good
YED < 0
inferior
good
0 < YED < 1
income
inelastic
demand,
normal
good
Figure 3.9 Demand curve shifts in response to increases in income for
different YEDs
0
P
Q
S
P
2
P
1
Q
1
Q
2
10%
5%
0
P
Q
S
P
2
P
1
Q
1
Q
2
10%
15%
S
1
Q
1
0
P
Q
S
2
S
3
S
0
P
Q
P
1 S
0
P
Q
Frequently encountered cases
(a) Price inelastic supply: PES < 1 (b) Price elastic supply: PES > 1
Special cases
(c) Unit elastic supply: PES = 1 (d) Perfectly inelastic supply: PES = 0 (e) Perfectly elastic supply: PES =
Figure 3.11 Supply curves and PES
Cambridge University Press 2012 Economics for the IB Diploma 8
Important diagrams to remember
0
P
Q
P
2
P
1
D
1
D
2
D
3
S
P
3
(a) Primary commodities: demand shifts with inelastic supply
0
P
Q
P
2
P
1
D
1
D
2
D
3
S
P
3
(b) Manufactured products: demand shifts with elastic supply
Figure 3.13 Price uctuations are larger for primary commodities because of low PES
Cambridge University Press 2012 Economics for the IB Diploma 9
Important diagrams to remember
Chapter 4 Government intervention
Figure 4.1 Supply curve shifts due to indirect (excise) taxes
0
P
Q
S
2
(= S
1
+ tax)
S
1
tax per
unit
(a) Specic tax
0
P
Q
(= S
1
+ tax) S
2
S
1
tax per
unit
tax per
unit
(b) Ad valorem tax
Figure 4.2 Impacts of specic and ad valorem taxes on market outcomes
0
Q Q
t Q
*
P
P
c
P
*
P
p
S
1
S
2
(= S
1
+ tax)
D
tax per
unit
government
revenue
(a) Market outcomes: specic tax
0
Q Q
t
Q
*
P
P
c
P
*
P
P
S
1
S
2
= S
1
+ tax
D
tax per
unit
government
revenue
(b) Market outcomes: ad valorem tax
0
P
Q
S
2
= S
1
subsidy
S
1
subsidy
per unit
P
c
P*
P
p
Q
sb
Q*
D
Figure 4.8 Impacts of subsidies on market outcomes
Cambridge University Press 2012 Economics for the IB Diploma 10
Important diagrams to remember
0
P
Q
s
Q
e
Q Q
d
P
e
P
c
D
S
shortage =
excess demand
Figure 4.12 Price ceiling (maximum price) and market outcomes
0
P
Q
e
Q
P
e
P
f
excess supply =
surplus
Q
d
Q
s
D
S
Figure 4.15 Price oor (minimum price) and market outcomes
Figure 4.17 Welfare impacts of a price oor (minimum price) for
agricultural products and government purchases of the
surplus
0
P
Q
e
Q
P
e
P
f
Q
d
Q
s
D = MB
D +
government
purchases
welfare
loss
S = MC
a
b
d
c
f
e
excess supply =
surplus
0
a
e
d
b
c
Q Q
e
Q
d
P
S = MC
Q
s
D = MB
P
e
P
c
welfare loss
Figure 4.13 Welfare impacts of a price ceiling (maximum price)
Figure 4.16 An agricultural product market with price oor and
government purchases of the surplus
0
P
Q
e
Q
P
e
P
f
Q
d
Q
s
D
D +
government
purchases
S
excess supply =
surplus
Cambridge University Press 2012 Economics for the IB Diploma 11
Important diagrams to remember
0
Q
d
Q Q
s
W
e
W
m
Q
e
p
r
i
c
e

o
f

l
a
b
o
u
r

(
w
a
g
e
)
quantity of labour
excess supply of labour
= labour surplus
= unemployment
supply
of
labour
demand
for
labour
Figure 4.19 Labour market with minimum wage (price oor) Figure 4.20 Welfare impacts of a minimum wage
0
a
d
e
c b
Q Q
e
Q
s
P
S
Q
d
D
W
m
W
e
welfare loss
Figure 4.6 Incidence of an indirect tax with inelastic and elastic demand
0
P
Q
S
2
= S
1
+ tax
S
1
tax per
unit
consumers
producers
P
c
P
p
P*
Q
t
Q*
D
(a) Inelastic demand
0
P
Q
S
1
tax per
unit
producers
P
c
P*
P
p
Q
t
Q*
D
S
2
= S
1
+ tax
consumers
(b) Elastic demand
Figure 4.7 Incidence of an indirect tax with inelastic and elastic supply
S
2
= S
1
+ tax
0
P
Q
S
1
P
c
P*
P
p
Q
t
Q*
D
tax per
unit
consumers
producers
(a) Inelastic supply
0
P
Q
S
2
= S
1
+ tax
S
1
P
c
P*
P
p
Q
t
Q*
D
tax per
unit
producers
consumers
(b) Elastic supply
Higher level topics
Cambridge University Press 2012 Economics for the IB Diploma 12
Important diagrams to remember
Figure 4.4 Effects of indirect taxes on consumer and producer surplus
0
Q* Q
P
P*
consumer
surplus
producer
surplus
S = MC
D = MB
0 Q Q
t
Q*
P
P
p
P
c
P*
S
2
= S
1
+ tax
S
1
= MC
D = MB
welfare loss = a + b
tax per
unit
producer
surplus
after the
tax
consumer
surplus
after the tax
a
b
government
revenue from
the tax
(b) Consumer and producer surplus with an indirect
(excise) tax: welfare loss
(a) Consumer and producer surplus in a competitive
free market: maximum social surplus
Figure 4.10 Effects of subsidies on consumer and producer surplus
0
Q* Q
P
P*
consumer
surplus
producer
surplus
S = MC
D = MB
(a) Consumer and producer surplus in a competitive
free market: maximum social surplus
0
Q Q* Q
sb
P
P
c
P
p
P*
S
2
= S
1
subsidy
S
1
= MC
D = MB
welfare loss
subsidy
per unit
a
gain in producer
surplus
gain in consumer
surplus
(b) Consumer and producer surplus with a subsidy: welfare loss
Cambridge University Press 2012 Economics for the IB Diploma 13
Important diagrams to remember
Chapter 5 Market failure
Figure 5.1 Demand, supply and allocative efciency with
no externalities
0 Q Q
opt
P
P
opt
S = MPC = MSC
allocative efficiency
is achieved
D = MPB = MSB
Figure 5.2 Negative production externality
0 Q Q
opt
P
Q
m
P
m
P
opt
MSC
S = MPC
D = MPB = MSB
external
cost
Figure 5.3 Welfare loss (deadweight loss) in a negative
production externality
0 Q Q
opt
P
Q
m
P
m
P
opt
MSC
S = MPC
D = MPB = MSB
external
cost
welfare loss
(a) Welfare loss
0 Q Q
opt
P
Q
m
P
m
P
opt
MSC
S = MPC
D = MPB = MSB
Figure 5.4 Government regulations to correct negative production
externalities
Cambridge University Press 2012 Economics for the IB Diploma 14
Important diagrams to remember
0
Q
MSB
Q
opt
P
S = MPC = MSC
Q
m
D = MPB
external
cost
P
m
P
opt
Figure 5.6 Negative consumption externality
Figure 5.7 Welfare loss (deadweight loss) in a negative
consumption externality
0 Q Q
opt
P
Q
m
P
opt
P
m
MSB
S = MPC = MSC
D = MPB
external
cost
welfare loss
(a) Welfare loss
Figure 5.5 Market-based policies to correct negative production externalities
0 Q Q
opt
P
P
c
= P
opt
tax = external cost
Q
m
P
m
P
p
MSC = MPC + tax
S = MPC
D = MPB = MSB
(a) Imposing an indirect tax on
output or on pollutants
0 Q Q
opt1
Q
opt2
P
Q
m
P
m
MSC
1
= MPC + tax
S = MPC
MSC
2
D = MPB = MSC
(b) Effects on external costs of a tax on
emissions (carbon tax)
0 Q
D
1
Q
1
P
P
2
D
2
P
1
S of tradable
permits
(c) Tradable permits
Figure 5.8 Correcting negative consumption externalities
0
Q Q
opt
P
P
opt
P
m
S = MPC = MSC
Q
m
D
1
= MPB
external
cost
D
2
= MSB
after demand decreases
(a) Government regulations and advertising
(b) Market-based: imposing an indirect tax
0
Q
MSB
Q
opt
P
P
c
P
m
P
p
S = MPC = MSC
Q
m
D = MPB
MPC + tax
tax =
external
cost
Cambridge University Press 2012 Economics for the IB Diploma 15
Important diagrams to remember
Figure 5.11 Correcting positive production externalities
0
Q
MSC
Q
opt
P
S = MPC
Q
m
D = MPB
spillover
benefit
P
opt
P
m
(a) Direct government provision
0
Q
MSC
Q
opt
P
S = MPC
Q
m
D = MPB
subsidy =
spillover benefit
P
opt
P
m
(b) Granting a subsidy
Figure 5.9 Positive production externality
0
Q
MSC
Q
opt
P
S = MPC
Q
m
D = MPB = MSB
external
benefits
P
opt
P
m
Figure 5.10 Welfare loss (deadweight loss) in a positive
production externality
0
Q
MSC
Q
opt
P
S = MPC
Q
m
D = MPB = MSB
external
benefits
P
opt
P
m
welfare loss
(a) Welfare loss
Cambridge University Press 2012 Economics for the IB Diploma 16
Important diagrams to remember
Figure 5.14 Correcting positive consumption externalities
0
Q Q
opt
P
P
opt
P
m
S = MPC = MSC
Q
m
D
1
= MPB
external
benefit
D
2
= MSB
(a) Legislation or advertising
0
Q Q
opt
P
P
c
P
m
S = MPC = MSC
Q
m
D = MPB
MSB
S + government
provision
(b) Direct government provision
0
Q Q
opt
P
P
c
P
m
S = MPC = MSC
Q
m
D = MPB
MSB
MPC
subsidy
subsidy =
external
benefit
(c) Granting a subsidy
Figure 5.13 Welfare loss (deadweight loss) in a positive
consumption externality
0
Q Q
opt
P
Q
m
D = MPB
S = MPC = MSC
external
benefits
P
m
P
opt
welfare loss
MSB
0
Q
MSB
Q
opt
P
S = MPC = MSC
Q
m
D = MPB
external
benefit
P
m
P
opt
Figure 5.12 Positive consumption externality
Cambridge University Press 2012 Economics for the IB Diploma 17
Important diagrams to remember
Chapter 6 The theory of the rm I: Production, costs, revenues and prot
Figure 6.2 Total, average and marginal cost curves
(d) Average cost and marginal cost curves
(c) Total cost, total variable cost and total
xed cost curves
TC
TVC
TFC
c
o
s
t
s

output, Q
c
o
s
t
s

MC
ATC
AVC
AFC
0
0
output, Q
Figure 6.1 Total, marginal and average products
(c) Total product curve
(d) Marginal and average product curves
units of variable input (labour)
TP
AP
MP
0
0
units of variable input (labour)
u
n
i
t
s

o
f

o
u
t
p
u
t
u
n
i
t
s

o
f

o
u
t
p
u
t
0
units of variable input (labour)
u
n
i
t
s

o
f

o
u
t
p
u
t

(
A
P
,

M
P
)
AP
MP
0
output, Q
c
o
s
t
s

(
A
V
C
,

M
C
)
AVC
MC
Figure 6.3 Product curves and cost curves are mirror images due to the law of
diminishing returns
Higher level topics
Cambridge University Press 2012 Economics for the IB Diploma 18
Important diagrams to remember
Figure 6.5 The long-run average total cost curve
(b) Long-run average total cost curve in relation to
short-run average total cost curves
0
output, Q
c
o
s
t
s
Q
1
Q
2
a
b
SRATC
1
SRATC
2
SRATC
m
LRATC
Figure 6.10 Prot maximisation using the total revenue and total cost approach when the rm has no control over price
0
c
o
s
t
s
,

r
e
v
e
n
u
e
s
Q
1
Q
2
Q
3
Q
TC
a
c
e
b
d
f
TR
0
c
o
s
t
s
,

r
e
v
e
n
u
e
s
Q
1
Q
2
Q
3
Q
TC
a
TR
0
c
o
s
t
s
,

r
e
v
e
n
u
e
s
Q
1
Q
2
Q
3
Q
TC
a
b
TR
(a) Prot-maximising rm produces at Q
2
and
makes economic prot: TR TC = c d
(b) Prot-maximising rm produces at Q
2
and
makes zero economic prot: TR TC = 0
(it earns normal prot)
(c) The loss-minimising rm produces at Q
2

(if it produces) and makes a loss = TC TR
= a b (negative economic prot since
TR < TC )
Figure 6.11 Prot maximisation using the total revenue and total cost approach when the rm has control over price
(a) Prot maximisation
0 Q
TC,
TR
TC
TR
a
b
Q
max
(b) Loss minimisation
0 Q
TC
TR
Q
1min
TC,
TR
(c) Economies and diseconomies of scale
0
c
o
s
t
s
economies
of scale
diseconomies
of scale
LRATC
output, Q
Cambridge University Press 2012 Economics for the IB Diploma 19
Important diagrams to remember
Chapter 7 The theory of the rm II: Market structures
(b) Market/industry
Figure 7.1 Market (industry) demand and supply determine demand faced by the perfectly competitive rm
0 Q
P
S
D
P
e
0 Q
P
D
P
e
(a) Individual rm
Figure 7.4 Summary of the perfectly competitive rms short-run decisions, and the rms short-run supply curve
0
output, Q
MC
Q
1
price,
revenue,
costs
P
1
ATC
AVC
P
2
P
3
P
4
P
5
Q
2
Q
3
Q
4
Q
5
5
4
3
2
1
P < AVC
firm makes loss
and shuts down
P > ATC
firm makes economic
(supernormal) profit
P = minimum ATC = break-even price
firm makes normal profit,
or zero economic profit
ATC > P > AVC
firm makes loss but
continues to produce
P = minimum AVC = shut-down price
firm is indifferent between producing
at a loss or not producing
Figure 7.2 Revenue curves under perfect competition
0
10
20
30
40
50
1
Q
2 3 4 5 6 7
60
70
TR
TR
(a) Total revenue
0
1
Q
2 3 4 5 6 7
P, MR, AR
D = P = MR = AR
10
20
30
40
(b) Marginal and average revenue
Higher level topic
Cambridge University Press 2012 Economics for the IB Diploma 20
Important diagrams to remember
Figure 7.3 Short-run equilibrium positions of the perfectly competitive rm
0 Q
MC
Q
1
p
r
i
c
e
,

r
e
v
e
n
u
e
,

c
o
s
t
s
P
1
ATC
AVC
total profit
profit
Q
P
1
= MR
1
= AR
1
= D
1
a
b
(a) Economic prot
0 Q
MC
Q
2
p
r
i
c
e
,

r
e
v
e
n
u
e
,

c
o
s
t
s
P
2
ATC
AVC
P
2
= MR
2
= AR
2
= D
2
= break-even price
(break-even point)
(b) Zero economic prot (normal prot)
0 Q
MC
Q
3
p
r
i
c
e
,

r
e
v
e
n
u
e
,

c
o
s
t
s
P
3
ATC
AVC
total loss
loss
Q
P
3
= MR
3
= AR
3
= D
3
c
d
(c) Economic loss: the rm continues to produce
0 Q
MC
Q
4
p
r
i
c
e
,

r
e
v
e
n
u
e
,

c
o
s
t
s
P
4
ATC
AVC
P
4
= MR
4
= AR
4
= D
4
= short-run
shut-down price
e
f
loss
Q
= AFC
total loss
(d) Loss in the short run and the shut-down price
(e) The loss-making rm that will not produce
0 Q
MC
Q
5
p
r
i
c
e
,

r
e
v
e
n
u
e
,

c
o
s
t
s
P
5
ATC
AVC
P
5
= MR
5
= AR
5
= D
5
g
h
0 Q
MC
Q
f
p
r
i
c
e
,

c
o
s
t
s
,

r
e
v
e
n
u
e
P
e
SRATC
LRATC
D = MR
0 Q
Q
i
S
D
P
P
e
Figure 7.5 The rm and industry long-run equilibrium position in perfect competition
(b) The industry (a) The rm
Cambridge University Press 2012 Economics for the IB Diploma 21
Important diagrams to remember
Figure 7.6 From short-run equilibrium to long-run equilibrium
0 Q Q
2
Q
1
P
2
P
1
ATC
MC
a
b
c
o
s
t
s
,

r
e
v
e
n
u
e
,

P
0 Q
P
Q
2
Q
1
P
2
P
1
S
1
D
S
2
1
2
From economic (supernormal) prot to normal prot
0 Q Q
2
Q
1
P
2
P
1
ATC
MC
a
b
c
o
s
t
s
,

r
e
v
e
n
u
e
,

P
0 Q Q
2
Q
1
P
1
P
2
P
S
1
D
S
2
1
2
From loss to normal prot
(b) The industry (a) The rm
(d) The industry (c) The rm
Figure 7.7 Productive and allocative efciency in perfect competition in the long run
(b) The market/industry (a) The rm
0 Q Q
e
MC
c
o
s
t
s
,

r
e
v
e
n
u
e
,

P
P
e
ATC
P = MR = P
e
0 Q
P
e
S = MC
P
D = MB
consumer
surplus
producer
surplus
Q
e
Cambridge University Press 2012 Economics for the IB Diploma 22
Important diagrams to remember
0 Q
P
r
P

MC
MR
D = AR
Q
r
p
r
i
c
e
,

c
o
s
t
s
,

r
e
v
e
n
u
e
Figure 7.12 Comparison of prot maximisation and revenue maximisation
by the monopolist
0
Q
c
o
s
t
s
D
LRATC
minimum efficient
scale
Figure 7.13 Natural monopoly
0
5
10
15
20
25
1
Q
2 3 4 5 6 7 8
30
35
40
TR
9 10 11
PED = 1
(unit elastic demand)
t
o
t
a
l

r
e
v
e
n
u
e

(



)
0
5
10
15
MR
p
r
i
c
e
,

r
e
v
e
n
u
e

(



)
1
Q
2 3 4 5 6 7 9 10 11
-5
P = AR = D
PED > 1
(price-elastic
demand)
PED < 1
(price-inelastic
demand)
8
(a) Total revenue
(b) Marginal and average revenue
Figure 7.10 Revenue curves in monopoly
Figure 7.11 Prot maximisation and loss minimisation
in monopoly: marginal revenue and cost approach
0 Q
MC
Q
max
p
r
i
c
e
,

c
o
s
t
s
,

r
e
v
e
n
u
e
P
e
profit
a
b
ATC
D = AR
MR
(b)
(a)
0 Q
MC
Q
l min
p
r
i
c
e
,

c
o
s
t
s
,

r
e
v
e
n
u
e
P
e
loss
c
d
ATC
D = AR
MR
Cambridge University Press 2012 Economics for the IB Diploma 23
Important diagrams to remember
0 Q
p
r
i
c
e
,

c
o
s
t
s
,

r
e
v
e
n
u
e
a
P
pc
Q
pc
P = MR
pc
D = MB
S = MC
0 Q
p
r
i
c
e
,

c
o
s
t
s
,

r
e
v
e
n
u
e
P
pc
P
m
Q
m
D = MB
MC
a
b
Q
pc
MR
m
Figure 7.14 Higher price, lower output by the rm in monopoly
(b) Monopoly (a) Industry in perfect competition
Figure 7.15 Consumer and producer surplus and welfare (deadweight) loss in monopoly compared with perfect competition
(a) Perfect competition
0 Q
A
consumer
surplus
P
pc
Q
pc
D = MB
S = MC
P
producer
surplus
B
0 Q
consumer
surplus
Q
pc
D = MB
MC
P
C
Q
m
D
P
m
welfare (deadweight) loss
E
F
MR
m
producer
surplus
(b) Monopoly
Figure 7.16 Allocative and productive inefciency in perfect competition and monopoly
0 Q
P
e
p
r
i
c
e
,

c
o
s
t
s
MC
ATC
at long-run equilibrium
production takes place at greater than
min ATC (productive inefficiency), and
P
e
> MC (allocative inefficiency)
at long-run equilibrium
production takes place at min ATC
(productive efficiency), and
P
e
= MC (allocative efficiency)
0 Q
P
e
Q
m
p
r
i
c
e
,

c
o
s
t
s
,

r
e
v
e
n
u
e
MC
ATC
MR
D
Q
pe
(a) Perfectly competitive rm (b) Monopoly
Cambridge University Press 2012 Economics for the IB Diploma 24
Important diagrams to remember
Figure 7.22 Long-run equilibrium of the rm in monopolistic
competition
0 Q
P
e
Q
e
MC
ATC
MR
D = AR
Q
c
p
r
i
c
e
,

c
o
s
t
s
,

r
e
v
e
n
u
e
4
40
million
Zs
40
million
Zs
70
million
Zs
10
million
Zs
10
million
Zs
70
million
Zs
20
million
Zs
20
million
Zs
3
2
1
U
n
i
v
e
r
s
a
l

S
p
a
c
e

L
i
n
e
s

p
r
i
c
e
L
o
w

p
r
i
c
e
H
i
g
h

p
r
i
c
e
Intergalactic Space Travels price
High price Low price
Figure 7.23 Game theory: the prisoners dilemma
0
Q
MC
Q
max
p
r
i
c
e
,

c
o
s
t
s
,

r
e
v
e
n
u
e
P
e
profit
a
b
ATC
D = AR
MR
Figure 7.24 Prot maximisation by a price-xing cartel
0 Q
P
1
Q
1
MR
D
P
Z
MC
1
MC
2
Figure 7.25 The kinked demand curve
Figure 7.21 Short-run equilibrium positions of the rm in monopolistic competition
(a) Economic prot (b) Normal prot (c) Losses
0 Q
P
e
Q
e
p
r
i
c
e
,

c
o
s
t
s
,

r
e
v
e
n
u
e
MC
ATC
MR
D = AR
economic
(supernormal)
profit
0 Q
P
e
Q
e
p
r
i
c
e
,

c
o
s
t
s
,

r
e
v
e
n
u
e
MC
ATC
MR
D = AR
0 Q
P
e
Q
e
p
r
i
c
e
,

c
o
s
t
s
,

r
e
v
e
n
u
e
MC
ATC
MR
D = AR
losses
Cambridge University Press 2012 Economics for the IB Diploma 25
Important diagrams to remember
Figure 7.26 Third-degree price discrimination
0 Q
D
1
Q
1
P
P
1
MR
1
0 Q
D
2
Q
2
P
P
2
MR
2
0 Q
MC
Q
3
P
MR = MR
1
+ MR
2
(a) Market 1 (b) Market 2 (c) Market 1 and market 2
Cambridge University Press 2012 Economics for the IB Diploma 26
Important diagrams to remember
Chapter 8 The level of overall economic activity
l
a
n
d
,

l
a
b
o
u
r
,

c
a
p
i
t
a
l
, e
n
t
re
p
re
neurship
land, labo
u
r, c
a
p
it
a
l
,
e
n
t
r
e
p
r
e
n
e
u
r
s
h
i
p

g
o
o
d
s

a
n
d
s
e
r
v
ic
e
s
g
o
o
d
s
a
n
d

s
e
r
v
i
c
e
s

h
o
u
s
e
h
o
ld

re
v
e
n
u
e
s

e
x
p
e
n
d
it
u
re

co
s
t
s
o
f
p
r
o
d
u
c
t
i
o
n

h
o
u
s
e
h
o
l
d
in
c
o
m
e
(
r
e
n
t
, w
a
g
e
s,
i
n
t
e
r
e
s
t
, p
ro
fit)
resource
markets
product
markets
households
(consumers)
firms
(businesses)
Figure 8.1 Circular ow of income model in a closed economy with no
government
Figure 8.3 Circular ow of income model with leakages and injections
households
(consumers)
firms
(businesses)
other countries
government
financial markets
(wages, rents, interest, profit)
consumer expenditure
s
a
v
in
g

t
a
x
e
s

s
p
e
n
d
i
n
g

o
n

i
m
p
o
r
t
s

in
v
e
s
t
m
e
n
t

g
o
v
e
r
n
m
e
n
t

s
p
e
n
d
i
n
g

s
p
e
n
d
i
n
g

o
n

e
x
p
o
r
t
s

factor incomes
(spending on goods and services)
Cambridge University Press 2012 Economics for the IB Diploma 27
Important diagrams to remember
Figure 8.4 The business cycle
0
time (years)
r
e
a
l

G
D
P
peak
trough
expansion
contraction
real GDP actually achieved
long term growth trend,
or potential GDP
peak
trough
Figure 8.5 Illustrating actual output, potential output and unemployment in the business cycle
0
time (years)
r
e
a
l

G
D
P
a
d
b
e
c
long term
growth trend, or
potential GDP =
full employment GDP;
unemployment =
natural rate of
unemployment
expansion:
unemployment
falls
actual GDP > potential GDP;
there is an output gap:
unemployment < natural
rate of unemployment
contraction:
unemployment
increases
actual GDP
actual GDP < potential GDP; there is an
output gap: unemployment > natural
rate of unemployment
Cambridge University Press 2012 Economics for the IB Diploma 28
Important diagrams to remember
Chapter 9 Aggregate demand and aggregate supply
0
real GDP
AD
p
r
i
c
e

l
e
v
e
l
0
real GDP
AD
3
p
r
i
c
e

l
e
v
e
l
AD
1
AD
2
Figure 9.1 The aggregate demand (AD) curve
(a) The aggregate demand curve
(b) Shifts in the aggregate demand curve
Figure 9.2 The short-run aggregate supply curve (SRAS )
Figure 9.4 Three short-run equilibrium states of the economy
(a) The economy with a deationary
(recessionary) gap
(b) The economy with an inationary gap
(c) The economy at the full employment
level of output
0
real GDP
SRAS
p
r
i
c
e

l
e
v
e
l
Y
e
AD
Pl
e
Y
p
0
real GDP
SRAS
p
r
i
c
e

l
e
v
e
l
Y
e
AD
Pl
e
Y
p
0
real GDP
SRAS
p
r
i
c
e

l
e
v
e
l
AD
Pl
e
Y
p
= Y
e
(a) The upward-sloping SRAS curve
0
real GDP
SRAS
p
r
i
c
e

l
e
v
e
l
(b) Shifts in the SRAS curve
0
real GDP
SRAS
3
p
r
i
c
e

l
e
v
e
l
SRAS
1
SRAS
2
Cambridge University Press 2012 Economics for the IB Diploma 29
Important diagrams to remember
Figure 9.5 Impacts of changes in short-run macroeconomic equilibrium
Figure 9.6 Possible causes of the business cycle
0
real GDP
SRAS
p
r
i
c
e

l
e
v
e
l
Y
rec
Pl
3
AD
1
Pl
1
Pl
2
Y
p
Y
infl
AD
2
AD
3
recessionary
(deflationary) gap
inflationary
gap
0
real GDP
SRAS
1
p
r
i
c
e

l
e
v
e
l
Y
2
Pl
2
Pl
1
Pl
3
Y
p
Y
3
AD
SRAS
2
LRAS LRAS
SRAS
3
recession with
inflation
('stagflation')
higher real
GDP with lower
price level
(a) Changes in aggregate demand (b) Changes in short-run aggregate supply
0
real GDP
SRAS
p
r
i
c
e

l
e
v
e
l
Y
p
AD
LRAS
Figure 9.7 The LRAS curve and long-run equilibrium in the monetarist/
new classical model
0
real GDP
SRAS
p
r
i
c
e

l
e
v
e
l
Y
3
Pl
2
AD
1
Pl
1
Pl
3
Y
1
Y
2
AD
2
AD
3
(a) Changes in aggregate demand
0
real GDP
SRAS
1
p
r
i
c
e

l
e
v
e
l
Y
3
Pl
3
Pl
1
Pl
2
Y
1
Y
2
AD
SRAS
3
SRAS
2
(b) Changes in short-run aggregate supply
Cambridge University Press 2012 Economics for the IB Diploma 30
Important diagrams to remember
Figure 9.12 Three equilibrium states of the economy in the Keynesian model
0
real GDP
p
r
i
c
e

l
e
v
e
l
Y
e
Keynesian AS
Y
p
AD
0
real GDP
p
r
i
c
e

l
e
v
e
l
Y
p
Keynesian AS
Y
e
AD
0
real GDP
p
r
i
c
e

l
e
v
e
l
Y
p
= Y
e
Keynesian AS
AD
(a) Recessionary (deationary) gap (b) Inationary gap (c) Full employment equilibrium
(a) Creating and eliminating a deationary gap (b) Creating and eliminating an inationary gap
Figure 9.8 Returning to long-run full employment equilibrium in the monetarist/new classical model
0
real GDP
LRAS
p
r
i
c
e

l
e
v
e
l
Y
rec
Pl
1
AD
1
Pl
2
Pl
3
Y
p
AD
2
SRAS
1
SRAS
2
a
b
c
LRAS
AD
1
AD
2
SRAS
1
SRAS
2
a
b
c
0
real GDP
p
r
i
c
e

l
e
v
e
l
Y
infl
Pl
3
Pl
2
Pl
1
Y
p
0
real GDP
p
r
i
c
e

l
e
v
e
l
Y
p
section I
Keynesian AS
Y
max
section II
section III
Figure 9.11 The Keynesian aggregate supply curve
0
real GDP
LRAS
p
r
i
c
e

l
e
v
e
l
Pl
1
AD
1
Pl
2
Y
p
AD
2
SRAS
1
SRAS
2
Figure 9.9 Changes in long-run equilibrium in the monetarist/new
classical AD-AS model
Cambridge University Press 2012 Economics for the IB Diploma 31
Important diagrams to remember
0
real GDP
p
r
i
c
e

l
e
v
e
l
LRAS
AD
1
AD
2
AD
3
Pl
1
Pl
2
Pl
3
0
real GDP Y
1
Y
p
Y
2
Y
3
p
r
i
c
e

l
e
v
e
l
AD
1
AD
2
AD
3
AD
4
Y
p
Keynesian AS
Figure 9.13 Effects of increases in aggregate demand on real GDP and the price level
(b) The Keynesian model (a) The monetarist/new classical model
0
real GDP Y
p1
p
r
i
c
e

l
e
v
e
l
Y
p2
AS
2
AS
1
(b) The Keynesian model
0
real GDP Y
p1
p
r
i
c
e

l
e
v
e
l
Y
p2
LRAS
2
LRAS
1
(a) The monetarist/new classical model
Figure 9.14 Increasing potential output, shifts in aggregate supply curves and long-term economic growth
Figure 9.15 Long-term economic growth: achieving potential (full employment) output in a growing economy
(b) The Keynesian model (a) The monetarist/new classical model
0
real GDP
p
r
i
c
e

l
e
v
e
l
AD
1
AD
2
SRAS
1
LRAS
1
Y
1
Y
2
Pl
1
SRAS
2
LRAS
2
0
real GDP
p
r
i
c
e

l
e
v
e
l
AD
1
AD
2
Y
1
Y
2
AS
1
AS
2
Cambridge University Press 2012 Economics for the IB Diploma 32
Important diagrams to remember
Figure 9.17 Aggregate demand, real GDP and the multiplier in the
Keynesian model
0
real GDP
p
r
i
c
e

l
e
v
e
l
AD
1
Y
1
Y
2
Y
3
AD
2
AD
3
autonomous
spending
induced
spending
$8
million
$24
million
$32 million
Figure 9.18 How the effect of the multiplier changes depending on the
price level
0
real GDP
p
r
i
c
e

l
e
v
e
l
Y
1
Y
2
Y
3
AD
1
AD
2
AD
3
AD
4
Keynesian AS
Pl
1
Pl
2
Pl
3
Higher level topic
Cambridge University Press 2012 Economics for the IB Diploma 33
Important diagrams to remember
Chapter 10 Macroeconomic objectives I: Low unemployment, low and stable
rate of ination
Figure 10.1 Structural unemployment
0
p
r
i
c
e
Q
2
P
1
P
2
Q
1
Q
S
D
1
D
2
P
(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 re
workers with inappropriate skills or
local workers no longer needed due to
relocation
(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
0
p
r
i
c
e
Q
2
P
2
P
1
Q
1
Q
D
S
1
S
2
P
0
P
Q
d
Q Q
s
W
e
W
m
Q
e
p
r
i
c
e

o
f

l
a
b
o
u
r

(
w
a
g
e
)
quantity of labour
labour surplus =
unemployment
supply
of
labour
demand
for
labour
(c) Minimum wage legislation and labour union
activities lead to higher than equilibrium wages
and lower quantity of labour demanded
0
real GDP
p
r
i
c
e

l
e
v
e
l
Y
rec
Pl
1
Pl
2
Y
p
LRAS
SRAS
AD
1
AD
2
0
real GDP
p
r
i
c
e

l
e
v
e
l
Y
rec
Pl
1
Pl
2
Y
p
AD
1
AD
2
Keynesian AS
Figure 10.2 Cyclical unemployment
(a) The monetarist/new classical model
(b) The Keynesian model
Figure 10.4 Demand-pull ination
0
real GDP
p
r
i
c
e

l
e
v
e
l
Y
p
LRAS
Y
infl
AD
1
AD
2
SRAS
Pl
2
Pl
1
(a) The monetarist/new classical model
0
real GDP
p
r
i
c
e

l
e
v
e
l
Y
p
Y
infl
AD
1
AD
2
Pl
2
Pl
1
AS
(b) The Keynesian model
0
real GDP
p
r
i
c
e

l
e
v
e
l
Y
rec
Y
p
LRAS
SRAS
2
SRAS
1
Pl
2
Pl
1
AD
1
Figure 10.5 Cost-push ination
Cambridge University Press 2012 Economics for the IB Diploma 34
Important diagrams to remember
Figure 10.8 The short-run and long-run Phillips curves
(a) The shape of the LRPC and SRPC
0
r
a
t
e

o
f

i
n
f
l
a
t
i
o
n
c
b
a
LRPC
SRPC
1
SRPC
2
9%
7%
5%
unemployment rate
5% 3%
5% = natural rate
of unemployment
(b) The reasoning behind the two curves in
terms of the AD-AS model
0
real GDP
p
r
i
c
e

l
e
v
e
lc
b
a
AD
1
Pl
3
Pl
2
Pl
1
Y
p
Y
infl
SRAS
2
SRAS
1
AD
2
LRAS
Figure 10.7 Stagation: outward shifts of the short-run Phillips curve due to decreasing SRAS
0
unemployment rate
r
a
t
e

o
f

i
n
f
l
a
t
i
o
n
c
b
a
PC
1
PC
2
PC
3
(a) The shifting Phillips curve
(b) The reasoning behind SRAS shifts in
terms of the AD-AS model
0
real GDP
p
r
i
c
e

l
e
v
e
l
c
b
a
AD
SRAS
3
Pl
3
Pl
2
Pl
1
Y
1
Y
2
Y
3
SRAS
2
SRAS
1
Higher level topic
Cambridge University Press 2012 Economics for the IB Diploma 35
Important diagrams to remember
Chapter 11 Macroeconomic objectives II: Economic growth and equity in the
distribution of income
Figure 11.1 Using the production possibilities model to illustrate economic
growth
X
Y
0
A
B
(a) Economic growth as an increase in actual output caused by
reductions in unemployment and productive inefciency
X PPC
3
PPC
2
PPC
1
Y
0
A
B
C
(b) Economic growth as an increase in production possibilities
caused by increases in resource quantities or improvements in
resource quality
0
c
u
m
u
l
a
t
i
v
e

p
e
r
c
e
n
t
a
g
e

o
f

i
n
c
o
m
e
a
cumulative percentage of population
100
80
60
40
20
20 40 60 80 100
e b
c
d
f
g
h
Bolivia
perfect
income
equality
Belarus
Figure 11.3 Lorenz curves: Belarus achieves greater income equality than
Bolivia
0
c
u
m
u
l
a
t
i
v
e

p
e
r
c
e
n
t
a
g
e

o
f

i
n
c
o
m
e
cumulative percentage of population
100
80
60
40
20
20 40 60 80 100
before
redistribution
increased income
equality after
redistribution
perfect income
equality
Figure 11.4 Lorenz curves and income redistribution
Cambridge University Press 2012 Economics for the IB Diploma 36
Important diagrams to remember
Chapter 12 Demand-side and supply-side policies
Figure 12.1 Effects of expansionary policy: eliminating a recessionary
(deationary) gap
0
real GDP
p
r
i
c
e

l
e
v
e
l
AD
1
AD
2
SRAS
LRAS
Y
rec
Y
p
Pl
2
Pl
1
(a) The monetarist/new classical model
0
real GDP
p
r
i
c
e

l
e
v
e
l
Y
rec
Y
p
Pl
2
Pl
1
AD
2
AD
1
Keynesian AS
(b) The Keynesian model
SRAS
LRAS
0
real GDP
p
r
i
c
e

l
e
v
e
l
potential output
AD
1
AD
2
Y
infl
Y
p
Pl
1
Pl
2
(a) The monetarist/new classical model
0
real GDP
p
r
i
c
e

l
e
v
e
l
AD
1
AD
2
Y
infl
Y
p
Pl
1
Pl
2
potential output
AS
(b) The Keynesian model
Figure 12.2 Effects of contractionary policy: eliminating an
inationary gap
Figure 12.3 Crowding out of private investment
0
real GDP
p
r
i
c
e

l
e
v
e
l
Y
1
Y
2
AD
3
AD
2
AD
1
Y
3
SRAS
due to G
due to I
0
real GDP
p
r
i
c
e

l
e
v
e
l
Y
1
Y
2
AD
2
SRAS
due to G
due to I
AD
1
(a) Partial crowding out
(b) Complete crowding out
Cambridge University Press 2012 Economics for the IB Diploma 37
Important diagrams to remember
Figure 12.4 The money market and determination of the rate of interest
0
r
a
t
e

o
f

i
n
t
e
r
e
s
t
S
m
D
m
Q
e
i
quantity of money
0
r
a
t
e

o
f

i
n
t
e
r
e
s
t
S
m1
D
m
Q
1
i
1
quantity of money
S
m3
Q
3
S
m2
Q
2
i
3
i
2
(a) Equilibrium rate of interest (b) Changes in the supply of money cause
changes in the equilibrium rate of interest
Cambridge University Press 2012 Economics for the IB Diploma 38
Important diagrams to remember
Chapter 13 International trade
0
g
o
o
d

Y
good X
country A
country B
0
g
o
o
d

Y
good X
country A
country B
(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
0
g
o
o
d

Y
good X
country As PPC
country Bs PPC
Figure 13.5 Identical opportunity costs:
no gains from trade
Production possibilities when each
country produces only cotton or
only microchips
Opportunity cost of cotton Opportunity cost of microchips
(1)
Cotton
(2)
Microchips
(3) (4)
Cottonia
20 10 10 units of microchips
=
1
20 units of cotton 2
20 units of cotton
= 2
10 units of microchips
Microchippia
25 50 50 units of microchips
= 2
25 units of cotton
25 units of cotton
=
1
50 units of microchips 2
or
or
Table 13.2 Comparative advantage
Figure 13.2 Comparative advantage
0
c
o
t
t
o
n
microchips
10
15
20
25
10 20 30 40 50 60
Cottonias
PPC
Microchippias PPC
5
Figure 13.4 The gains from specialisation and trade based on comparative
advantage: both countries consume outside their PPC
0
c
o
t
t
o
n
microchips
5
10
15
20
25
10 20 30 40 50
D consumption
C production
(a) Cottonia exports 10 units of cotton and
imports 10 units of microchips
(b) Microchippia exports 10 units of
microchips and imports 10 units of cotton
0
c
o
t
t
o
n
microchips
5
10
15
20
25
10 20 30 40 50
B
A production
consumption
Figure 13.3 Absolute and comparative advantage
Cambridge University Press 2012 Economics for the IB Diploma 39
Important diagrams to remember
Figure 13.7 Effects of a tariff
P
w
0
Q
P
Q
1
S
d
=
domestic
supply
D
d
= domestic demand
Q
2
P
w + t
world price =
world supply curve
Q
3
Q
4
imports with tariff
imports without tariff
P
d
tariff
world price + tariff
government revenue
(a) Effects on imports
P
w
0
Q
P
Q
1
S
d
=
domestic supply
D
d
= domestic demand
Q
2
P
w + t
world price =
world supply curve
Q
3
Q
4
imports with tariff
imports without tariff
a b
c
d
e
f
g
world price + tariff
tariff
welfare loss = d + f
(b) Welfare effects
Figure 13.9 Effects of a quota
(a) Effects on imports
P
w
0
Q
P
Q
1
S
d
= domestic supply
D
d
= domestic demand
Q
2
world price =
world supply curve
Q
3
Q
4
imports with quota
imports without quota
P
q
S
dq
= domestic supply
plus quota quota
quota
revenue
(b) Welfare effects
P
w
0
Q
P
Q
1
S
d
= domestic supply
D
d
= domestic demand
Q
2
world price =
world supply curve
Q
3
Q
4
imports with quota
imports without quota
P
q
S
dq
= domestic supply
plus quota quota
welfare loss = d + e + f
a
b
c
d
e
f
e
g
Figure 13.11 Production subsidies
(a) Production subsidy: quantity of imports falls
P
w
P
s
0
Q
P
Q
1
S
d
= domestic supply
D
d
= domestic demand
Q
2
world price =
world supply curve
Q
3
imports after subsidy
imports before subsidy
S
ds
= domestic
supply minus subsidy
subsidy
Cambridge University Press 2012 Economics for the IB Diploma 40
Important diagrams to remember
Chapter 14 Exchange rates and the balance of payments
(a) The market for US dollars
0




p
e
r

$

=

p
r
i
c
e

o
f

$

i
n

t
e
r
m
s

o
f



0.80
0.67
0.50
Q of $ (dollars)
excess supply of $
excess demand for $
D for $
(dollars)
S of $
(dollars)
equilibrium
exchange rate
(b) The market for euros
0
$

p
e
r




=

p
r
i
c
e

o
f




i
n

t
e
r
m
s

o
f

$
2.00
1.50
1.25
Q of (euros)
excess demand for D for
(euros)
S of
(euros) excess supply of
equilibrium
exchange rate
Figure 14.1 Exchange rate determination in a freely oating exchange
rate system Figure 14.2 Exchange rate changes in a freely oating exchange rate system
0




p
e
r

$

=

p
r
i
c
e

o
f

$

i
n

t
e
r
m
s

o
f



0.90
0.67
Q of $ (dollars)
D
1
for $
S of $
D
2
for $
A
B
C
(a) Demand for $ increases: $ appreciates
(b) Supply of increases: depreciates
Figure 14.3 Fixed exchange rates: maintaining the value of the bople at 1 bople = $2.00
(a) Shifting the currency demand curve
0
$

p
e
r

b
o
p
l
e

=

p
r
i
c
e

o
f

b
o
p
l
e
s

i
n

t
e
r
m
s

o
f

$
2.00
1.50
Q of boples
S of boples
A B
C
fall in demand for Bopland's
exports reduces demand
for boples
central bank buys excess
boples, increasing demand
for boples
2.
1.
D
1
for boples D
2
for boples
(b) Shifting the currency supply curve
0
$

p
e
r

b
o
p
l
e

=

p
r
i
c
e

o
f

b
o
p
l
e
s

i
n

t
e
r
m
s

o
f

$
2.00
Q of boples
D
1
for boples
S
2
D
2
for boples
A B
fall in demand for Bopland's
exports reduces demand
for bople
S
1
of boples
imports are reduced,
therefore the supply
of boples falls
1.
2.
0
$

p
e
r




=

p
r
i
c
e

o
f




i
n

t
e
r
m
s

o
f

$
Q of (euros)
1.50
1.11
D for
S
1
of
D
F
E
S
2
of
Cambridge University Press 2012 Economics for the IB Diploma 41
Important diagrams to remember
Figure 14.6 Using a PPC to illustrate a trade decit and a trade surplus
(a) With a trade decit, country consumes outside its PPC
0
good B
g
o
o
d

A
C
PPC
(b) With a trade surplus, country consumes inside its PPC
0
good B
g
o
o
d

A
D
PPC
Cambridge University Press 2012 Economics for the IB Diploma 42
Important diagrams to remember
Chapter 15 Economic integration and the terms of trade
Figure 15.1 Changes in global demand or supply: terms of trade impacts on the balance of trade
P
2
0
Q
1
Q
3
Q
2
D
1
D
3
D
2
P
1
P
3
S
global supply
of wheat
global demand
for wheat
global supply
global demand
P
2
0
g
l
o
b
a
l

p
r
i
c
e

o
f

i
n
t
e
r
n
a
t
i
o
n
a
l
l
y
t
r
a
d
e
d

g
o
o
d
quantity of internationally
traded good
quantity of internationally
traded good
g
l
o
b
a
l

p
r
i
c
e

o
f

i
n
t
e
r
n
a
t
i
o
n
a
l
l
y
t
r
a
d
e
d

g
o
o
d
Q
1
Q
2
D
S
2
P
1
Q
3
P
3
S
3 S
1
(a) Changes in global demand: terms of trade and
balance of trade change in same direction
(b) Changes in global supply: effects of terms of trade changes on
the balance of trade depend on PEDs for exports and imports
0
P
Q
D
2
D
1
S
2
S
1
P
2
P
1
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)
Higher level topic
Cambridge University Press 2012 Economics for the IB Diploma 43
Important diagrams to remember
Chapter 16 Understanding economic development
Figure 16.1 Economic growth and economic development
merit goods
i
n
d
u
s
t
r
i
a
l

g
o
o
d
s
0
A
B
C
PPC
1
PPC
2
D
E
AB: no economic growth with some development
BC: economic growth with no development
BD or E: economic growth with development
Figure 16.2 The poverty cycle (poverty trap)
low
income
low
savings
low
investment
low physical
capital
low
human
capital
low natural
capital
low productivity
of labour
and land
low growth
in income