Y12/Y13 micro diagram illustration and explanations

Question 1

For monopoly deadweight welfare loss…

Answer 1

Steps for curve illustration:
- AR curve (downward sloping) and MR curve (downward sloping)
- MC = S | curve (upward sloping)
- MC = MR marked (dot this off to x-axis at Pm and y-axis at Qm) and MC = AR marked (dot this off to x-axis at Pc and y-axis at Qc)
- Label x-axis price,costs,rev and y-axis qty.
Format for A,B,C,D,E/triangle labelling:
A
BC
DE

(See scanned diagram/diagram)

Question 2

For monopolistic competition…

(LR and SR)

Answer 2

LR:
- AR and MR curves (downward sloping)
- MC curve
- MC = MR marked + AR marked
- AC curve tangential to AR curve(LR)
- AC curve goes above MC = MR and through AR curve
- P1 for AR (MC = MR) and Q1 for horizontal line downwards.
- Label axises,(price,costs and rev on x-axis and qty on y-axis)
SR:
- AR and MR curves (downward sloping)
- AC curve tangential to AR curve.
- MC curve (law of diminishing returns), this cuts through AC’s lowest point.
-> CORRECTLY LABEL CURVE AND AXISES.

(See scanned diagram/diagram) and MC cuts AC at AC’s lowest point!

Question 3

For collusive firms that restrict output to maintain higher prices (with quotas)…

(Firm and market)

Answer 3

Market:
- AR and MR curves (downward sloping)
- AC curve, and MC curve cuts AC at AC’s lowest point.
- MC = MR marked, AR marked (dot this off to x-axis at Po and y-axis at Qo) and AC marked (dot this off to x-axis at ACo).
- Shade in supernormal profit.
Firm:
- AC curve (dot this off to y-axis at Q1 and x-axis, then dot off to x-axis at Po above AC curve.
- Shade in supernormal profit.

(See scanned diagram/diagram)

Question 4

For a natural monopoly…

(A profit-maximising natural monopoly will limit output at MC = MR.

Answer 4

• AR and MR curves (downward sloping)
• AC and MC curves (respectively downward sloping)
• MC and MR marked, AC marked and AR marked (dot AR off to x-axis at P1 and y-axis at Q1, dot AC off to x-axis C1).
• Shade in supernormal profit.
• Mark AC as ‘a’ (dot this off to x-axis C2 and MC = AR as ‘b’ (dot this off to x-axis Ps and y-axis Qs.
• Shade in loss + vertical line from a to b is the subsidy that may be given.

(See scanned diagram/diagram)

Question 5

For perfect competition in the short-run…

(Supernormal profits)

Answer 5

Firm:
- Right shift in supply, lowering price and increasing qty.
Market:
- AR curve downshifts
- MC curve
- AC curve tangential to AR2.

(See scanned diagram/diagram) and LR diagram, and losses diagram).

Question 6

For 1st degree, 2nd degree and 3rd degree price discrimination…

Answer 6

1st degree:
- Consumer surplus turns into supernormal profit.
2nd degree:
- Supernormal profit shaded and total revenue shaded (top and bottom)
3rd degree:
- AR and MR curves (downward sloping)
- AR marked (dot this off to x-axis P (a or b) and y-axis (a or b)

(See scanned diagram/diagram)

Question 7

For kinked demand curve to show why firms do NOT want to change price…

(Oligopolies)

Answer 7

Illustration:
- Demand curve elastic from top, then inelastic from 1/4 down -> Label this D = AR -> An AR curve
- Draw MR curve (twice as steep), then vertical from 90% down from top, then inelastic from x-axis and underneath. -> Label this MR and plot this on x-axis at Q1 + Plot up to curve then y-axis at P1.
- Draw 2 MC curves where MR curve vertical section is -> Label bottom curve MC1 and top curve MC2.
- Costs rise from MC1 to MC2.

(May explain price rigidity)

(Check diagram)

Question 8

Explanation of kinked demand curve to show why firms do NOT want to change price…

Answer 8

• Raising price reduces market share
• Reducing means lost revenue in LR
• So, altering price from P1 makes no sense (due to independence).
• If oligopoly is a profit-maximiser, P1 will always be charged (as long as costs change within the vertical gap).
• Price wars may still occur -> So no or little competition e.g. soft drinks market.
• Firms may collude to stop the worry about independence.

(May explain price rigidity).

Question 9

Details on individual labour supply curve…

Answer 9

• Draw backward bending supply curve and label it ‘S’
• Label y-axis ‘real wage’ and x-axis ‘hours worked’
• Then, split diagram into 3 parts, and refer to income effect, substitution effect and wage effect.

Question 10

Details on the Lorenz curve and Gini coefficient…

Answer 10

• (Right to left) Draw axes and label y-axis ‘cumulative percentage of income’ and x-axis cumulative percentage of the population
• Draw diagonal line
• Draw second line below (needs to bend)
• The more the line bends, the HIGHER the share of INCOME goes to a relatively small amount of the POPULATION.
• ‘0’ = perfect equality, ‘1’ would be perfect inequality.
• Research shows that there has been a rise in inequality overtime.

Question 11

Details on TUs in a monopsony labour market…

Answer 11

• Draw diagram and label y-axis wage and x-axis qty of workers.
• Draw downward sloping D = MRP curve
• Draw upward sloping curve S = AC L and upward sloping curve MC L
• Plot MRP = ACL as Wc on y-axis and Qc on x-axis.
• Plot MRP = MCL as Qm on x-axis.
• Plot S = AC L as Wm on y-axis.

Question 12

Details on additional lines and plotting…

Answer 12

• Draw a total horizontal line between Wm and Wc, up to S = AC L, and plot S = AC L. (Label y-axis WTU and x-axis QTU). + Draw vertical line up to MCL and draw small dissimilar line adjacent to corresponding MCL point (label new dissimilar line MCL TU)
• From previous plot, draw small dissimilar visible line adjacent to S = ACL curve and label this STU = ACL.

Question 13

Explanation of TUs in a monopsony labour market…

Answer 13

• WTU horizontal line is horizontal line as TU makes the monopsony a wage-taker, NOT wage-maker.
• Before STU = ACL, this horizontal line is supply curve, new ACL curve and new MCL curve.
• STU = ACL (adjacent dissimilar line) shows how the supply curve reverts back to its original as the monopsony

(Wages and unemployment rise)

Question 14

Details on a TU in a competitive labour market…

Answer 14

• Draw SL and D = MRP (and plot WC on y-axis and QC on x-axis)
• This is the competitive level
• Above this, horizontal line up to SL, and then plot to y-axis and label it WTU. + Workers are happy with WTU as they were happy with Wc, (which was a lower wage).
• Plot SL = D and draw to x-axis and label it QTU. + Do other dot on SL
• Draw adjacent dissimilar line on SL and label it STU (supply trade union). -> STU has boosted wages however, has caused some unemployment. + STU goes upwards due to more workers employed, and WTU rises due to rise in wages.
• Shade in unemployment (excess supply). -> Due to supply exceeding demand for qty of workers.
• WTU is what TUs want, a higher wage.