Diagram Bank Economics

8/12/2019 Diagram Bank Economics

1/172

PPFs and Other Diagrams


2/172

Output of capital goods

Outputofconsumergoodsandservices

A

B

C


3/172

Heart Operations

AllOtherOperation

s

A

B

C


4/172

Output (Q)

Costs

RevenuesSAC1

SAC2

AR (Demand)


5/172

Basic Supply and Demand

Analysis


6/172

Demand Curve

Price

Quantity Demanded

Demand

P1

P2

P3

Q1Q2 Q3


7/172

Shift in demand

Price

Quantity Demanded

D1

P1

Q1Q2 Q3

D3D2


8/172

Price

Demand

Price

Demand

Relatively Inelastic Demand

Consumer Surplus and Price Elasticity of Demand

P1

Q1 Q2

Relatively Elastic Demand


9/172

Price

Demand

Price

Demand

Relatively Inelastic Demand

Consumer Surplus and Price Elasticity of Demand

P1

Q1 Q2

Relatively Elastic Demand

Quantity DemandedQuantity Demanded


10/172

Price Price

Perfectly Elastic Demand Perfectly Inelastic Demand

Demand

Demand

QuantityQuantityQ1Q2 Q3

P1 P1

P2

P3

Q1


11/172

Price Price

Perfectly Elastic Supply Perfectly Inelastic Supply

Supply

Supply


P1 P1

P2

P3

Q1


12/172

Price Price

Relatively Elastic Supply

Supply responds quickly to a change in

demand

Relatively Inelastic Supply

Supply responds less than proportionately to a

change in price

Supply

Supply


P1

P1

P2

P3

Q1

D3D2D1

P2

P3

D3D2

D1


13/172

Price

Quantity

D1

Supply

P1

Q1

D2

P2

Q2


14/172

Price of

DVD

players

Quantity

demanded

D1

Supply of

DVD

players

P1

Q1

D2

P2

Q2


15/172

Price of

Sterling in

Euros

Quantity of Pounds

Sterling

Demand 1

Supply

P1

Q1

Demand 2

P2

Q2


16/172

Price

Quantity

D1

S1

P1

Q1

D2

P2

Q2

S2

P3

Q3


17/172

Price

Quantity of

Council Housing

Demand

S1

P1

Q1

P2

Q2

Supply + Sub

P3

Government Subsidy

Subsidy per

unit


18/172

Average

Weekly

Rent

Quantity of

Council Housing

Demand

S1

P1

Q1

P2

Q2

Supply +

Subsidy

Government Subsidy

Subsidy per

unit


19/172

Price

Quantity

Demand

Supply pre

subsidy

Q1 Q2

Supply + Export

Subsidy

A

B

C

D

E

F

G


20/172

Price

Quantity

D1

S1

P1

Q1

S2

P2

Q2


21/172

Price

Quantity

D1

S2

A

S1

B

C

DE

F

G H

IJ


22/172

Price

Quantity

Demand

Supply post tax Supply pre tax

P2

P1

Q1


23/172

Price

Quantity

Price

Quantity

Price

Quantity

Price

Quantity

SupplySupply

Supply Supply

A B

C D

Supply curves with different price elasticity


24/172

Price

Quantity

Price

Quantity

Price

Quantity

Price

Quantity

Demand

Supply

Demand

A B

C D

Demand curves with different price elasticity

Demand

Demand


25/172

Price

Quantity

D1

Supply

P1

Q1

D2

P2

Q2


26/172

Price of

Good S

Quantity demanded of Good T

Demand


27/172

Price

Quantity

D2

S1

P2

Q2

D1

P1

Q1

S2


28/172

Price

Quantity

D2

P1

Q1

S pre

subsidy

Price

Quantity

D2

P1

Q1

S pre

subsidy


29/172

Price

Quantity

Demand

Supply

P max

Q1

Maximum Prices

Pe

Price Ceiling

Q2

Free Market

Equilibrium

Excess

Demand


30/172

Rent

s

Quantity of Rented

Property

Demand

Supply

P max

Q1

Maximum Prices

Pe

Price (Rent) Ceiling

Q2

Free Market

Equilibrium

Excess

Demand


31/172

Price

Quantity

Demand

Supply

P max

C

Maximum Prices

Pe

Maximum Price

A B D


32/172

Price

Quantity of output

Demand

Supply

P min

Q1

Pe

Price Floor (Guaranteed)

Q2

Excess

Supply

Q3


33/172

Price

Quantity

Demand

Supply

P min

Price Support SchemesBuffer Stocks

Pe

Minimum Price

B CA


34/172

Price

Quantity

Demand

Supply

P min

Q1

Price Support SchemesBuffer Stocks

Pe

Price Floor (Guaranteed)

Q4Q3

S2


35/172

Price

Quantity

Demand

S1

P1

P2

Q3Q2

S2


36/172

Price

Quantity

Demand

S1

P1

Increasing Market Supply Consumer Benefits

P2

Q3Q2

S2


37/172

Price

Quantity

Demand

Supply

P1

Q1

Equilibrium

Point

Producer Surplus

Producer

Surplus


38/172

Price

Quantity

Demand

Supply

P1

Q1

Producer Surplus

B

A

C D


39/172

Price

Quantity

Demand

Supply

P1

Q1

Equilibrium

Point

Consumer Surplus

Consumer

Surplus


40/172

Price

Quantity

Demand

Supply

P1

Q1

Equilibrium

Point

Market Equilibrium


41/172

Market Failure Diagrams


42/172

Social Efficiency / Welfare Losses

Output (Q)

Demand = Private

Benefit = Social Benefit

Private Marginal

Cost (Supply)

Q1

Costs

Revenues

Social Marginal

Cost

Q2

ExternalCost

P1

P2


43/172

Benefits

Costs

Quantity of

Output (Q)

Demand (Private Marginal Benefit)

Marginal PrivateCost

P1

Q1

Social

Equilibrium

Negative Externalities

Marginal Social

Cost

Q2

a

b

c


44/172

Tackling Externalities


Taxation

PollutionTradingSchemes

Tax Credits

VoluntaryAgreement

Regulation

Aggregates Levy

Landfill Tax

Fuel Duty

Climate Change Levy(CCL)

Emissions tradingscheme

Landfill permits

Pesticides

EU C02 from carsagreement

Water qualitylegislation

Reduced VAT oninstallation of centralheating


45/172

Benefits

Costs

Quantity of

Output (Q)

Demand (Private Marginal Benefit) =

Social Marginal Benefit (SMB)

Marginal PrivateCost

P1

Q1

Social

Equilibrium

Loss of Social Welfare from Externalities

Marginal Social

Cost

Q2

a

b

c

Deadweight loss of

economic welfare

Marginal External Cost


46/172

Merit Goods

CostsBenefits

Quantity ofHousing

PrivateDemand

Supply

Demand +

ExternalBenefits

Qp Qs

External Benefit

A

B


47/172

Merit Goods and Welfare Loss

CostsBenefits

Output (Q)

PMB

PMC = SMC

SMB

Qp Qs

External Benefit

Welfare loss where SMB>PMBabove output Qp

A

B

C


48/172

The Demand Curve for Public Goods

CostsBenefits

Output (Q)

Demand from A

Value 1

Q1

Demand from B

Value 1

Value 2


49/172


CostsBenefits

Output (Q)

Demand A

Value 1

Q1

Demand B

Value 1

Value 2

Demand A+B


50/172

Socially Efficient Provision of Public Goods

CostsBenefits

Output (Q)

Demand A Demand B

Demand A+B

Marginal SocialCost (MSC)

Qp


51/172


CostsBenefits

Output (Q)

PMB = SMB

PMC

SMC

QpQs

External Cost

Net Welfare Loss

MarginalExternal Cost


52/172

Negative Externalities Pollution Tax

CostsBenefits

Output (Q)

PMB = SMB

PMC

SMC

QpQs

PMC + TAX


53/172

Price

Quantity

Demand (Limited Information)

Marginal PrivateCostP1

Q1

De-Merit Goods and Health Awareness

Marginal Social

Cost

Q2Q3

Demand (Full Information)


54/172

Price

Quantity

Domestic

Demand

Domestic

Supply

P1

Q1

Export Subsidy

Domestic Price

World Price

World Price +

Sub

P2

P3

Q2Q3


55/172


56/172

Price

Quantity

Domestic

Demand

Domestic

Supply

P1

Q1

Import Tariffs

World Price

World Price +

TariffP2

Q4Q3 Q2

A B

CD

E F

G H

C S l


57/172

Price

Quantity

D1

Supply

P1

Q1

Consumer Surplus

Outward Shift in Demand

Price

Quantity

Demand

S1

P1

Q1

Consumer

Surplus

S2

P2

Q2

D2

P2

Q2

Outward Shift in Supply


58/172

Price

Quantity

D2

SRS

P2

Q1

Price

Quantity

D1

S1

P1

Q1

D3

Q3

P3

D1

Q2

P1

An Outward Shift in DemandAn Inward Shift in Demand


59/172

Price

Quantity

D2

SRS

P1

Q2

Price

D1

Q1

P2

An Outward Shift in Market Demand

Long Run Market Supply is more Elastic

An Outward Shift in Market Demand

Short Run Market Supply is Inelastic

Quantity

SRS

P1

Q2

D1

Q1

P2

D2

LRS

Q3

a

b


60/172

Price

Quantity

D1

S1

P1

Q1

Price

Quantity

D1

S1

P1

Q1

D3

Q2

P2

D2

Q2

P2

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

S2

S2


61/172

Quantity

D1

S1

P1

Q1

D2

Q2

P2

An Outward Shift in Coffee Demand and a Rise in Coffee Supply

S2


62/172

Quantity

D1

S1

P1

Q1

D2

Q2

P2

An Outward Shift in Oil Demand when Supply is Inelastic


63/172


64/172

Price

Quantity

D1

S1

P1

Q1 Q2

P2

S2


65/172

Price

Quantity

S1

Q1

Price

Quantity

D1

S1

P1

Q1 Q3

P3

D2

Q2

P1

An Outward Shift in SupplyAn Inward Shift in Supply

S2

P2

S3

I di t T d El ti it f D d


66/172

Price

Quantity

S1

Q1

Price

Quantity

D1

S + Tax

P2

Q2 Q1

P1D1

Q2

P1

A Tax when Demand is Price InelasticA Tax When Demand is Price Elastic

S + Tax

P2

S1

Indirect Taxes and Elasticity of Demand


67/172


68/172

Price

Quantity

P2

P3

P1

Q2Q1 Q3

P4

P5

Supply

Q4 Q5


69/172

Price

Quantity

S1

P1

Q1Q3 Q2

S2

S3

Increase in

Supply

Decrease in

Supply


70/172

Theory of the Firm Diagrams


71/172

Sh t R C t C


72/172

Costs

Output (Q)

Short Run Cost Curves

Average Fixed

Cost (AFC)

Average

Variable Cost(AVC)

Average Total

Cost (ATC)

Marginal Cost

(MC)


73/172

I i V i bl C t


74/172

Costs

Output (Q)

Increase in Variable Costs

Average

Variable Cost

(AVC)

Average TotalCost (ATC)

Marginal Cost

(MC)

MC2 AC2

AVC2

The Long Run Average Cost Curve


75/172

Costs

Output (Q)


SRAC1

SRAC2SRAC3

Q1 Q2 Q3

AC1

AC2

AC3



76/172

Costs

Output (Q)


SRAC1

SRAC2SRAC3

Q1 Q2 Q3

AC1

AC2

AC3

LRAC

The Minimum Efficient Scale (MES)


77/172

Costs

Output (Q)

The Minimum Efficient Scale (MES)

SRAC1

SRAC2SRAC3

Minimum

Efficient

Scale

LRAC

Economies of scale (falling LRAC) due to

increasing returns

Diseconomies of scale (rising LRAC) due to

decreasing returns to scale

Economies of Scale and Profits


78/172

Costs

Output (Q)

Economies of Scale and Profits

SRAC1

SRAC2

AR

(Demand)

MR

MC1

MC2

P1

P2

Q1 Q2

Profit at Price P1

Profit at Price P2


79/172

Different output levels (2)


80/172

Costs

Output (Q)

Different output levels (2)

ATC

AR

(Demand)

MR

MC

A B C D

Monopoly Price and Output in the Short Run


81/172

Monopoly Price and Output in the Short Run

ATC

Demand (AR)

MR

MC

Q1

Revenue

Cost and

Profit

Output (Q)

P1

AC1

Monopoly versus Competition


82/172

Monopoly versus Competition

LRAC = LRMC

Monopoly

Demand (AR)

MR

Q1

Revenue

Cost and

Profit

Output (Q)

D

E

Qc

B

A

C

Monopoly versus Competition (Welfare Loss)


83/172

Monopoly versus Competition (Welfare Loss)

LRAC = LRMC

Monopoly

Demand (AR)

MR

Q1

Monopoly Profit

at Price P1

Revenue

Cost and

Profit

Output (Q)

P1

Pc

Qc

B

A

C

Deadweight

Welfare Loss

Natural Monopoly


84/172

Natural Monopoly

Demand (AR)

Revenue

Cost and

Profit

Output (Q)

LRMC

LRAC

Natural Monopoly losses and profits


85/172

Natural Monopoly losses and profits

Demand (AR)

Revenue

Cost and

Profit

Output (Q)

MR

LRMC

LRAC

P1

AC1

Q1 Q2

P2

AC2

Profit at

price P1Loss atprice P2

Benefits from Cross Subsidisation


86/172

Benefits from Cross Subsidisation

Monopoly

Demand (AR)

Revenue

Cost and

Profit

Output (Q)

MR

MC

AC

Revenue

Cost and

Profit

Output (Q)

AC

AR

MC

MR

Barriers to Entry Blockaded Entry


87/172

Barriers to Entry Blockaded Entry

LRAC = LRMC (Existing

Monopolist)

Monopoly

Demand (AR)

MR

Q1

Revenue

Cost and

Profit

Output (Q)

P1

Pc

Qc

B

A

C

AC = MC (PotentialEntrant into the market)

D

E

The Shut Down Price


88/172

Costs,

Revenues

Output (Q)

The Shut Down Price

ATC

AR

(Demand)

MR

P1

Q1Q2

MC

AVC

AR2

MR2

P2

The Shut Down Price


89/172

Costs,

Revenues

Output (Q)

The Shut Down Price

ATC

Q1

MC

AVC

AR2

MR2

P1

AC1A

B

C


90/172

Profits and an Increase in Variable Costs


91/172

Output (Q)

Profits and an Increase in Variable Costs

SRAC1

AR

(Demand)

MR

MC1

Q2 Q1

Profit at Price P2

Profit at Price P1

Costs

Revenues

P1

AC1

SRAC2

MC2

P2

AC2

Total Revenue and Cost (1)


92/172

Output (Q)

Total Cost (TC)Revenue

Cost and

Profit

Q1Q2 Q3

Total Profit

Max Profit

Min Profit

Q4

Total Revenue

(TR)

Profit Max Revenue Max

( )

Total Revenue and Cost under Perfect Competition


93/172

Output (Q)


Cost and

Profit

Q1 Q2

Total Revenue

(TR)

Break Even

TR=TC

p

Multi Choice Questions on This


94/172

Output (Q)


Cost and

Profit Total Revenue(TR)

A

0

B

C

D E

F

G

H

Total Revenue with a Perfectly Elastic Demand Curve


95/172

Output (Q)

Revenue

Cost and

ProfitTotal Revenue

(TR)

Average Revenue

(AR) = Marginal

Revenue (MR)

3

1 2

6

Total Revenue with a downward sloping demand curve


96/172

Output (Q)

Revenue

Cost and

Profit

Total Revenue

(TR)

Marginal Revenue

(MR)

Average Revenue

(Demand) AR

Total Revenue with a downward sloping demand curve


97/172

Output (Q)

Revenue

Cost and

Profit

Total Revenue

(TR)

Marginal Revenue

(MR)

Average Revenue

(Demand) AR

Total Revenue is

maximised whenMR = 0

Price elasticity of

demand = 1 at

this output


98/172

Profit Maximisation and Sales Revenue Max


99/172

Costs

Output (Q)

SRAC

AR

(Demand)

MR

MC

Q1

P1

AC1

Profit Max at Price P1

P2

AC2

Q2

Revenue Max at Price P2

Contestable Markets and The Conduct of Firms


100/172

Costs

Revenues

Output (Q)

SRAC

AR (Monopoly)

MR

MC

Q1

P1

Profit Max atPrice P1

P2

Q2

Normal Profit

output whereAC=AR

The Kinked Demand Curve


101/172

Assume we start out at P1 and Q1:

Will a firm benefit from raising price above P1?

Will it benefit from cutting price below P1?

Raising price above P1

Demand is relatively elastic

Firm loses market share and some

total revenue

Reducing price below P1

Demand is relatively inelastic

Little gain in market share other firms

have followed suit

Total revenue may still fall

Costs

Revenues

Output (Q)

P1

Q1

MR

AR

MC1


102/172


103/172

Introduction to Game Theory


104/172

Two prisoners are held in a separate

room and cannot communicate

They are both suspected of a crime

They can either confess or they can

deny the crime

Payoffs shown in the matrix are years

in prison from their chosen course of

action

Decisions made under uncertainty

Prisoner A

Confess Deny

Prisoner B

Confess (3 years, 3 years) (1 year, 10 years)

Deny (10 years, 1 year) (2 years, 2 years)

Introduction to Game Theory (2)


105/172

The equilibrium in the Prisoners

Dilemma occurs when each player takes

the best possible action for themselvesgiven the action of the other player

The dominant strategy is each prisoners

unique best strategy regardless of theother players action

Best strategy? Confess?

A bad outcome prisoners could do

better by both denying but once

collusion sets in, each prisoner has an

incentive to cheat!

Prisoner A

Confess Deny

Prisoner B

Confess (3 years, 3 years) (1 year, 10 years)

Deny (10 years, 1 year) (2 years, 2 years)

Price Fixing Cartels


106/172

Individual Firm Industry

Firms Output Industry Output

MC (industry)

Demand

MC

g

AC

MR


107/172

Price Fixing Cartels


108/172

Individual Firm Industry

Firms Output

MC (industry)

Demand

MR

P(cartel)

MC

AC

Quota IndustryOutput

P(cartel)

AC

Allocative Efficiency


109/172

Costs

Revenues

Output (Q)

AR

(Demand)

MC (Supply)

P1

Q1

Consumer

Surplus (CS)

Producer

Surplus (PS)


110/172


111/172

Price Discrimination (1stDegree)


112/172

( g )

Quantity of Output (Q)

Price (P)

AR (Market Demand)MR

P1

AC = MC

Q1

P2

P4

Q3Q2

Equilibrium output with perfect price

discrimination the monopolist will sell

an extra unit providing that the next

unit adds as much to revenue as it

does to cost

P3

P5

Q4 Q5

Peak and Off Peak Pricing


113/172

Supply (MarginalCost)

Off-Peak

Demand

Peak Demand

MR Off-Peak

MR Peak

Price Off-Peak

Price Peak

Output Off-Peak Output Peak

Price (P) andCosts

Output

Price Discrimination (1)


114/172

Market A Market B

MC=AC

QuantityQuantity

PricePrice

Pa

Pb

MRa

MRb ARb

ARa

Profit from selling to

market A with a

relatively elasticdemandand

charging a lower price

Demand in segment B of

the market is relatively

inelastic. A higher unit

price is charged

MC=AC

QbQa


115/172

Perfect Competition Sub Normal Profits


116/172

Output (Q)Output (Q)

Market Demand and Supply Individual Firms Costs and Revenues

Price (P) Price (P)

Market

Demand

Market

Supply

P1

Q1

AR = MR

MC

AC

AC1

Q2

Perfect Competition (2) Increase in Market Supply


117/172

Output (Q)Output (Q)

Market Demand and Supply Individual Firms Costs and Revenues

Price (P) Price (P)

Market

Demand

Market

Supply

P1

Q1

AR1 = MR1

MC (Supply)

AC

P1

Q3

P2P2

AR2 = MR2

Q2

MS2

P2

Comparing Monopoly with Perfect Competition


118/172

Output (Q)

Competitive Market Pure Monopoly

Price (P) Price (P)

MarketSupply

Market

Demand

Market

Supply

Monopoly

Demand

Q1 Q1

MR

P comp

P mon

Q2

Net loss of

producer surplus

Welfare Loss Under Pure Monopoly


119/172

Output (Q)


Price (P) Price (P)

MarketSupply

Market

Demand

Market

Supply

Monopoly

Demand

Q1 Q1

MR

P comp

P mon

Q2

Net loss of

consumer surplus

Net loss of

producer surplus

A

B

C

D

Pure Monopoly and Scale Economies


120/172

Output (Q)


Price (P) Price (P)

MarketSupply

Market

Demand

CompetitiveSupply (MC)

Monopoly

Demand

Q1 Q1

MR

P comp

P mon

Q2

Monopoly

Supply with

ScaleEconomies

Profit Maximisation and a Rise in Demand


121/172

Costs

Output (Q)

SRAC

AR1

(Demand)

MR1

MC

Q1

P1

AC1


P2

AC2

Q2


AR2

MR2

Minimum Efficient Scale (MES)


122/172

Costper

unit in

the

long

run

Output (Q)

LRAC

MES

Falling LRAC Economies of Scale (Increasing

Returns to Scale)

Rising LRAC Diseconomies of Scale (Decreasing

Returns to Scale)


123/172


124/172


125/172

Merit Goods and Welfare Loss


126/172

CostsBenefits

Output (Q)

PMB

PMC = SMC

SMB

Qp Qs

External Benefit

Welfare loss where SMB>PMBabove output Qp

A

B

C



127/172

CostsBenefits

Output (Q)

Demand from A

Value 1

Q1

Demand from B

Value 1

Value 2


128/172

Socially Efficient Provision of Public Goods


129/172

CostsBenefits

Output (Q)

Demand A Demand B

Demand A+B

Marginal SocialCost (MSC)

Qp



130/172

CostsBenefits

Output (Q)

PMB = SMB

PMC

SMC

QpQs

External Cost

Net Welfare Loss

MarginalExternal Cost


131/172

De-Merit Goods and Health Awareness


132/172

Price

Quantity

Demand (Limited Information)

Marginal Private

CostP1

Q1

Marginal Social

Cost

Q2Q3

Demand (Full Information)


133/172


134/172


135/172


136/172

Aggregate Demand and

Supply Analysis


137/172


138/172

Aggregate Demand and Supply


139/172

GeneralPrice Level

National Income

AD

SRAS

Pe

Ye

LRAS

Yfc

Negative Output Gap


140/172

GeneralPrice Level

National Income

AD1

SRAS

Pe

Ye

LRAS

Yfc

AD2

Y2

P2

AD-AS Analysis Causes of Deflation


141/172

General

Price Level

Real National Income

AD1SRAS

P1

Y1

LRAS

Yfc

AD2

Y2

P2

General

Price Level

AD1SRAS

P1

Y1

LRAS1 LRAS2

YFC2Y2

AD2

P2

Fall in AD Rise in LRAS greater than increase in AD


142/172

General

Price Level

AD1

SRAS

P1

Y1

LRAS1 LRAS2

YFC2Y2

AD2

P2

An Increase in Long Run Aggregate Supply


143/172

General

Price Level

National Income

AD1

SRAS

Pe

Y1

LRAS1 LRAS2

YFC2Y1

AD2


144/172

Aggregate Demand and Supply


145/172

GeneralPrice Level

National Income

AD

SRAS1

P1

Y1

LRAS

Yfc

SRAS2

P2

Y2

Shifts in Aggregate Demand


146/172

General

Price Level

National Income

AD1

SRAS

P1

Y1

LRAS

Yfc

AD2

P2

Y2

AD3

Y3

P3

The Risk of Demand Pull Inflation


147/172

General

Price Level

Real National Income

AD1

SRAS

P1

Y1

LRAS

Yfc

AD2

P2

Y2

AD3

P3


148/172

Shifts in Short Run Aggregate Supply


149/172

General

Price Level

National Income

AD

SRAS1

P1

Y1

LRAS

Yfc

SRAS2

P2

Y2

SRAS3

Y3

An Increase in Aggregate Demand


150/172

GeneralPrice Level

National Income

AD1

SRAS

P1

Y1

LRAS

Yfc

AD2

P2

Y2


151/172


152/172

Short Run Phillips Curve


153/172

Wage

Inflation

(%)

Unemployment Rate (%)U1

P1

U2

P2

U3

P3

Short Run Phillips Curve

Expectations-Augmented Phillips Curve


154/172

WageInflation

(%)

Unemployment Rate (%)U1

P1

U2

P2

U3

P3

SRPC1

SRPC2

SRPC3

Individual Labour Supply Curve


155/172

RealWage

Rate

Hours of Work

Supplied (LS)

Individual Labour

Supply (1)

Individual LabourSupply (2)

L1 L3 L2

The Supply of Labour


156/172

WageRate

Employment

LD2

LS

W2

E2

WageRate

LD1

E1

W1

An Outward Shift in Labour Demand when Labour Supply

is Inelastic

An Outward Shift in Labour Demand when Labour Supply

is Elastic

Employment

Labour Supply(short run)

W1

E2

D1

E1

W2

D2

Long Run

Labour

Supply

E3

a

b

W3c


157/172

Natural Rate of Unemployment


158/172

RealWage

Rate

Employment

Labour Supply

Labour

Force

Labour

Demand

W1a b

E1 E2

Reducing the Natural Rate of Unemployment


159/172

RealWage

Rate

Employment

LS1

Labour

Force

Labour

Demand

W1a b

E1 E2

LS2

c

E3


160/172


161/172


162/172


163/172

Monopsony Buyer of Labour


164/172

Wage

Rate

(W)

Employment of

Labour (E)

Demand =

MRPL

Labour

Supply

(ACL)

W1

E2

Marginal Cost

of Labour

(MCL)

W2

E3

W3

E1

W4

E4


165/172

Economic Profit (Price > AC)

Monopoly and Profit Margins


166/172

Price

Demand

P2

Q2

Price

Demand

P2

Q2

Economic Profit (Price AC)

AC AC

AC AC

Total Cost (AC x Output)


167/172

International Trade and Production Possibility Frontiers


168/172

Freezers FreezersPPF FOR THE UK

2000

PPF FOR ITALY

Dishwashers Dishwashers

1000

500 1000

1600

400200



169/172

Good Y Good Y

PPF FOR GERMANY PPF FOR FRANCE

Good S Good S

1500

2000

1500

1500


170/172



171/172

Freezers Freezers

PPF FOR THE UK

2000

PPF FOR ITALY

Dishwashers Dishwashers

1000

500 1000

1600

400200

3000

533

Import Tariffs


172/172

Price

Domestic Demand

Domestic Supply

World Price

Pw

World Price + Tariff

M

Pw + T

Diagram Bank Economics

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Transcript of Diagram Bank Economics