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 PRICE INDEX

SAS SAS SAS

110.0 110.0 110.0

P1
100.0 100.0 100.0

90.0 90.0 90.0 AD

AD
REAL GDP REAL GDP
REAL GDP0
0 0 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

MONEY
0 Qm1 Qm2

Marginal efficiency of capital

RATE OF INTEREST

r1

MEC1
INVESTMENT
0 I1

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
D S

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
D S
Set Price

P1

quantity
o Q1 Qs

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amount now demanded (and surplus Qs-Qd):

price
D S
Set Price

P1

quantity
o 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 Bananas

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Comparative advantage (uses production function)
Cars

6
5 Germany

2
1 Turkey

Rugs
O 1 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

Q
0 Quantity of pounds

You might find the supply curve is drawn vertically.

Wage equilibrium

Demand for labour = marginal product curve:

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 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 CLERKS

SOCCER PLAYERS
Wage
S lab
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 MC

Output
0

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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

AC MC

D
Output
0
MR
Price, Costs

P MC
AC

AC

D
Output
0 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

D
Q Output
0
MR

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Perfect competition:

Costs and Price

MC

AC

Price

Output
Output
0

Long run average cost curves (envelope curve) – economies of scale.

AVERAGE COSTS
LRAC
AC
AC AC
AC AC AC

TIME
0

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Social and private costs: pollution imposes costs on society (firm producing too much)

Price
Social costs

P2
Private costs
P1

Demand

Q2 Q1 Quantity
0
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

time
0

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.

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