Economics Diagrams

Question 1

Growth/negative growth with the production possibilities frontier (PPC/PPF )

Answer 1

Remember the axes here: consumer and capital goods. If there’s an increase in productive capacity, PPC/PPF shifts outwards, and opposite for negative growth.

Question 2

Change in demand

Answer 2

A shift in demand to the:
right: increased price + quantity
left: lower price + quantity

Question 3

Change in supply

Answer 3

A shift in supply to the:
right: lower price + higher quantity
left: higher price + lower quantity

Question 4

Price ceiling (with welfare effects)

Answer 4

Ceiling price set below equilibrium price. Causes shortages and welfare loss, but more consumer surplus and less producer surplus compared to before the price ceiling.

Question 5

Price floor (with welfare effects)

Answer 5

Floor price set above equilibrium, causes excess supply and much welfare loss due to government purchases, but increased producer surplus.

Question 6

Indirect tax (with welfare effects)

Answer 6

Welfare loss, lower consumer and producer surplus, and some tax revenue (but welfare loss as not all lost consumer and producer surplus becomes tax revenue)

Question 7

Subsidy (with welfare effects)

Answer 7

Higher consumer and producer surplus, but welfare loss as not all government expenditure creates consumer/producer surplus

Question 8

Negative production externality

Answer 8

Production of the good generates a negative third party effect, so MPC is to the right of MSC, good over-provided by the market

Question 9

Negative consumption externality

Answer 9

Consumption of the good generates a negative third-party effect, so MPB is to the right of MSB, and good is over-provided by the market

Question 10

Positive production externality

Answer 10

Production causes a positive third party effect, sp MSC to the right of MPC, good underprovided by the market

Question 11

Positive consumption externality

Answer 11

Consumption of the good generates a positive third-party effect, so MSB to the right of MPB, good underprovided by the market

Question 12

Perfect competition (firm and market)

Answer 12

Demand is fully elastic at firm level, they produce at minimum point of ATC and where MC = MB

Question 13

Monopoly: abnormal profit, normal profit, or loss minimization

Answer 13

Monopoly produces at MC = MR to profit-maximize, whether they make profits or losses depends on price and cost curves (usually we assume they make abnormal profit)

Question 14

The business cycle

Answer 14

Real GDP fluctuates around long-term growth trend, showing expansions and recessions. Axes are time and real GDP.

Question 15

Changes in aggregate demand (AD/AS)

Answer 15

Shift in AD to the right causes higher real GDP and higher price level, vice versa for shift to the left

Question 16

Changes in aggregate supply (AD/AS)

Answer 16

Shift in AS to the right causes higher real GDP and lower price level, vice versa for shift to the left

Question 17

Deflationary gap

Answer 17

Output is to the left of the LRAS (long-term potential), meaning unemployment is higher than the natural rate of unemployment (NRU), usually due to insufficient aggregate demand

Question 18

Inflationary gap

Answer 18

Output is to the right of the LRAS (long-term potential), meaning unemployment is lower than the natural rate of unemployment (NRU), usually due to excessive aggregate demand

Question 19

Keynesian AS curve

Answer 19

Three sections:
1. fully elastic, can increase GDP without it being inflationary
2. curved section, some scarcity of unutilized factors of production, increases in GDP bring inflation with it
3. factors of production exhausted, fully inelastic, GDP increase only inflationary.

Question 20

Demand-pull inflation

Answer 20

Inflation caused by AD shifting to the right

Question 21

Cost-push inflation

Answer 21

Inflation caused by AS shifting to the left

Question 22

Economic growth through increase in AS (for example, through supply side policies)

Answer 22

In monetarist diagram, shifting LRAS to the right means expanding the productive capacity of the economy. This will cause the SRAS to shift with it.
In the Keynesian diagram, the AS shifts rightwards.

Question 23

The Lorenz Curve

Answer 23

Maps inequality in a population:
Y-axis: cumulative % of income
X-axis: cumulative % of population
The closer the curve is to the diagonal line (line of perfect equality) the lower inequality is.

Question 24

Using expansionary policy to close an recessionary/deflationary gap

Answer 24

Lowering interest rates (or other expansionary monetary policy), or increasing government spending/cutting taxes (expansionary fiscal policy) shifts AD rightwards.

Question 25

Using contractionary policy to close an inflationary gap

Answer 25

Raising interest rates (or other contractionary monetary policy), or decreasing government spending/increasing taxes (contractionary fiscal policy) shifts AD leftwards

Question 26

Achieving long-term economic growth through supply-side policies

Answer 26

This will expand the productive capacity of the economy, so the LRAS will shift rightwards (same happens to AD and SRAS). For Keynesian, the AS shifts rightwards.

Question 27

How to show whether a country will import or export a good under free trade

Answer 27

If world supply price is above domestic equilibrium price, then the country will export. If it is below, country will import.

Question 28

Comparative advantage

Answer 28

One country produces a good at a lower domestic opportunity cost than another: one curve will be flatter/steeper than the other.

Question 29

Tariff, with welfare effects

Answer 29

In short, tariff increases price of imports to Pworld + tariff, which leads to: 1. Less consumption at higher price, less consumer surplus 2. Less imports and more domestic production than before, more producer surplus 3. Government revenue from tax revenue 4. Welfare loss

Question 30

Quota, with welfare effects

Answer 30

A quota is implemented which places a physical restriction on the amount of imports permitted. Diagramatically, we show this as the domestic supply shifting to the right by the amount of the quota (because after quota is exhausted, only option is domestic supply). Effects: 1. Less consumption at higher price, less consumer surplus 2. Less imports and more domestic production than before, more producer surplus 3. More welfare loss compared to tariff as there is no tax revenue for the government (area e)

Question 31

Exchange rates: appreciation

Answer 31

Appreciation of a currency (e.g. US$) can happen in two ways: 1. Increase in demand for dollars 2. decrease in supply of dollars

Question 32

Exchange rates: depreciation

Answer 32

Depreciation of a currency (e.g. US$) can happen in two ways: 1. Decrease in demand for dollars 2. Increase in supply of dollars

Question 33

The poverty cycle/poverty trap

Answer 33

Cycle where low income leads to low savings, leading to little investment, little productivity, and low growth in income. Shows that poverty perpetuates across generations.