Economics Diagrams Flashcards
Growth/negative growth with the production possibilities frontier (PPC/PPF )
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.
Change in demand
A shift in demand to the:
right: increased price + quantity
left: lower price + quantity
Change in supply
A shift in supply to the:
right: lower price + higher quantity
left: higher price + lower quantity
Price ceiling (with welfare effects)
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.
Price floor (with welfare effects)
Floor price set above equilibrium, causes excess supply and much welfare loss due to government purchases, but increased producer surplus.
Indirect tax (with welfare effects)
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)
Subsidy (with welfare effects)
Higher consumer and producer surplus, but welfare loss as not all government expenditure creates consumer/producer surplus
Negative production externality
Production of the good generates a negative third party effect, so MPC is to the right of MSC, good over-provided by the market
Negative consumption externality
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
Positive production externality
Production causes a positive third party effect, sp MSC to the right of MPC, good underprovided by the market
Positive consumption externality
Consumption of the good generates a positive third-party effect, so MSB to the right of MPB, good underprovided by the market
Perfect competition (firm and market)
Demand is fully elastic at firm level, they produce at minimum point of ATC and where MC = MB
Monopoly: abnormal profit, normal profit, or loss minimization
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)
The business cycle
Real GDP fluctuates around long-term growth trend, showing expansions and recessions. Axes are time and real GDP.
Changes in aggregate demand (AD/AS)
Shift in AD to the right causes higher real GDP and higher price level, vice versa for shift to the left
Changes in aggregate supply (AD/AS)
Shift in AS to the right causes higher real GDP and lower price level, vice versa for shift to the left
Deflationary gap
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
Keynesian AS curve
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.
Demand-pull inflation
Inflation caused by AD shifting to the right
Cost-push inflation
Inflation caused by AS shifting to the left
Economic growth through increase in AS (for example, through supply side policies)
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.
The Lorenz Curve
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.
Using expansionary policy to close an recessionary/deflationary gap
Lowering interest rates (or other expansionary monetary policy), or increasing government spending/cutting taxes (expansionary fiscal policy) shifts AD rightwards.
Using contractionary policy to close an inflationary gap
Raising interest rates (or other contractionary monetary policy), or decreasing government spending/increasing taxes (contractionary fiscal policy) shifts AD leftwards
How to show whether a country will import or export a good under free trade
If world supply price is above domestic equilibrium price, then the country will export. If it is below, country will import.
Comparative advantage
One country produces a good at a lower domestic opportunity cost than another: one curve will be flatter/steeper than the other.
Tariff, with welfare effects
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
Quota, with welfare effects
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)
Exchange rates: appreciation
Appreciation of a currency (e.g. US$) can happen in two ways:
1. Increase in demand for dollars
2. decrease in supply of dollars
The poverty cycle/poverty trap
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.
