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Important diagrams

Every diagram in the specification, with tips on how to use them

All the diagrams in the specification, in specification order. Tap or click a diagram to open it full size. Each section also links to its full notes.

Tip

For every diagram:

  • Label the axes: e.g. price and quantity.
  • Label every curve: including the new one. An arrow is not a label.
  • Move one curve: only the one the change affects.
  • Mark the new equilibrium: on both axes, e.g. P2 and Q2.
  • Use a ruler: for lines and guide lines.

1.1 The market system

1.1.1 The economic problem

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A production possibility curve: the most an economy can produce of two goods when it uses all its resources.

A production possibility curve for consumer goods and capital goods. Points A and B are on the curve, showing all resources fully employed. Point C is inside the curve, showing unemployed resources. Point D is outside the curve and is unobtainable. Moving from A to B gives 40 million more units of consumer goods but 20 million fewer units of capital goods.

Figure 1: A production possibility curve (PPC)

Tip

A move from A to B shows opportunity cost. Label each axis with its good, e.g. shampoo and toothpaste.

Positive economic growth: the PPC shifts outwards, so more of both goods can be produced.

Negative economic growth: the PPC shifts inwards, so less of both goods can be produced.

Two production possibility curve diagrams. On the left, positive economic growth shifts the PPC outwards from PPC1 to PPC2. On the right, negative economic growth shifts the PPC inwards from PPC1 to PPC2.

Figure 2: Shifts in the production possibility curve

Tip

More or better resources, e.g. new technology, shift the PPC outwards. Losing resources, e.g. through war, shifts it inwards.

1.1.3 Demand, supply and market equilibrium

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Movement along the demand curve: caused by a change in the good’s own price.

Shifts in the demand curve: caused by a change in something other than price. D2 is an increase in demand and D3 is a decrease.

Movement along the demand curve and shifts in the demand curve

Figure 3: Movements along and shifts in the demand curve

Tip

A change in price moves along the curve. Any other change, e.g. in income or advertising, shifts the whole curve.

Movement along the supply curve: caused by a change in the good’s own price.

Shifts in the supply curve: caused by anything other than a change in price. S2 is an increase in supply and S3 is a decrease.

Movement along the supply curve and shifts in the supply curve

Figure 4: Movements along and shifts in the supply curve

Tip

Higher costs or a new indirect tax shift supply to the left. Better technology or a subsidy shifts it to the right.

Market equilibrium: the point where the demand and supply curves cross.

Market equilibrium where demand and supply cross at Pe and Qe

Figure 5: Market equilibrium

Tip

Draw dashed lines from where the curves cross to both axes, and label them Pe and Qe.

Plotting from data: the daily figures for pizza slices at $2, $3 and $4, plotted as points and joined up.

Demand and supply curves for pizza slices plotted from data, crossing at $3 and 600 slices

Figure 6: Demand and supply curves plotted from data

Tip

Plot each price against its quantity, join the points, then label the curve D or S.

Increase in demand: price and quantity both rise.

Decrease in demand: price and quantity both fall.

Increase in supply: price falls and quantity rises.

Decrease in supply: price rises and quantity falls.

Effects of increases and decreases in demand and supply on equilibrium price and quantity

Figure 7: How shifts in demand and supply change the equilibrium

Tip

Decide which curve the change affects and which way it moves, then shift only that curve.

Excess demand: the price is set below equilibrium, so more is demanded than supplied: Qd is bigger than Qs.

Excess supply: the price is set above equilibrium, so Qs is greater than Qd.

Excess demand below the equilibrium price and excess supply above it

Figure 8: Excess demand and excess supply

Tip

Read off Qd and Qs at the set price. The gap between them is the excess demand or excess supply.

1.1.4 Elasticity

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Price inelastic demand: a steep curve. A big change in price causes a small change in quantity demanded.

Price elastic demand: a flat curve. A small change in price causes a big change in quantity demanded.

Price inelastic demand shown by a steep demand curve and price elastic demand shown by a flat demand curve

Figure 9: Price inelastic and price elastic demand

Tip

For elastic demand, show a small price change and a big quantity change. Do the reverse for inelastic demand.

Perfectly inelastic: a vertical curve, where PED = 0.

Unitary elasticity: a curved line, where PED = –1.

Perfectly elastic: a horizontal line, where PED = infinity.

Perfectly inelastic, unitary and perfectly elastic demand curves

Figure 10: Special cases of price elasticity of demand

Tip

Along a unitary elastic curve, total revenue is the same at every price.

Price inelastic supply: a steep curve. A big change in price causes a small change in quantity supplied.

Price elastic supply: a flat curve. A small change in price causes a big change in quantity supplied.

Price inelastic supply shown by a steep supply curve and price elastic supply shown by a flat supply curve

Figure 11: Price inelastic and price elastic supply

Tip

A straight supply curve that would meet the quantity axis is inelastic. One that would meet the price axis is elastic.

Perfectly inelastic: a vertical line, where PES = 0.

Unitary elasticity: a straight line starting from the origin, where PES = 1.

Perfectly elastic: a horizontal line, where PES = infinity.

Perfectly inelastic, unitary and perfectly elastic supply curves

Figure 12: Special cases of price elasticity of supply

Tip

Any straight supply curve that starts at the origin has a PES of 1, however steep it is.

1.2 Business economics

1.2.1 Production

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A developing economy: the primary sector employs the most people.

A developed economy: the tertiary sector employs the most people.

Example pie charts: in a developing economy the primary sector employs the most people, while in a developed economy the tertiary sector employs the most

Figure 13: Share of employment in each sector

Tip

In a developing country, make the primary slice the biggest, at least half. In a developed country, tertiary is the biggest and primary the smallest.

1.2.3 Economies and diseconomies of scale

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The LRAC curve: how a firm’s average cost changes as it grows.

Long run average cost curve: average cost falls with economies of scale, reaches its lowest point at the most efficient point, then rises with diseconomies of scale

Figure 14: The long run average cost (LRAC) curve

Tip

Label economies of scale on the falling part, diseconomies of scale on the rising part, and the most efficient point at the bottom.

1.2.5 The labour market

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The labour market: the equilibrium wage rate (We) and employment (Qe) are where the demand for labour (DL) meets the supply of labour (SL).

Labour market diagram: the equilibrium wage rate We and quantity of workers employed Qe are where the demand for labour DL meets the supply of labour SL

Figure 15: Wage determination in a labour market

Tip

It works like any other market, with the wage rate as the price.

Increase in demand for labour: the wage rate and employment both rise.

Decrease in demand for labour: the wage rate and employment both fall.

Increase in supply of labour: the wage rate falls and employment rises.

Decrease in supply of labour: the wage rate rises and employment falls.

Four labour market diagrams showing the effect on the wage rate and employment of an increase and a decrease in the demand for labour and in the supply of labour

Figure 16: Shifts in the demand for and supply of labour

Tip

For example, a lower retirement age or a higher school-leaving age shifts the supply of labour to the left.

1.2.6 Government intervention

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Introducing a minimum wage: set at W1, above the equilibrium wage rate (We).

Increasing the minimum wage: raised from W1 to W2.

Two minimum wage diagrams: a minimum wage W1 above the equilibrium wage We reduces labour demanded to Qd and raises labour supplied to Qs, causing unemployment. Raising it from W1 to W2 increases unemployment further

Figure 17: Introducing and increasing a minimum wage

Tip

Draw the minimum wage as a line above We. The gap between Qs and Qd is unemployment.

2.1 Government and the economy

2.1.1 Economic growth

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The economic cycle: real GDP rises and falls around its trend rate of growth.

The economic cycle: real GDP rises and falls around the trend rate of growth through boom, downturn, recession and recovery

Figure 18: The economic cycle

Tip

The stages always come in the same order: boom, downturn, recession, then recovery.

2.1.2 Supply-side policy

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Supply-side policies: the PPC shifts outwards from PPC1 to PPC2.

Supply-side policies shift the production possibility curve outwards from PPC1 to PPC2, so more capital goods and consumer goods can be produced

Figure 19: Supply-side policies and total output

Tip

This is the same outward shift of the PPC as positive economic growth.

2.2 The global economy

2.2.2 Methods of protection

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Introducing a tariff: supply shifts left, so the price rises and the quantity falls.

Removing or cutting a tariff: supply shifts right, so the price falls and the quantity rises.

Supply and demand diagrams showing the effect of introducing a tariff and of removing or cutting a tariff

Figure 20: Tariffs

Tip

A tariff works like an indirect tax on imports, so it shifts supply, not demand.

Introducing a quota: supply becomes a vertical line at the quota.

Increasing a quota: the vertical supply line shifts right.

Supply and demand diagrams showing a quota as a perfectly inelastic supply curve, and the effect of increasing a quota

Figure 21: Quotas

Tip

Extend the quota line above the demand curve. The new price is where it meets demand, not the old supply curve.

Introducing a subsidy: supply shifts right, so the price falls and the quantity rises.

Removing a subsidy: supply shifts left, so the price rises and the quantity falls.

Supply and demand diagrams showing the effect of introducing a subsidy and of removing a subsidy

Figure 22: Subsidies

Tip

Removing a subsidy shifts supply to the left, the same way as introducing a tariff.

2.2.3 Exchange rates

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The market for pounds: the exchange rate is set where the demand for pounds equals the supply.

Supply and demand diagram showing the equilibrium exchange rate in the market for pounds

Figure 23: The equilibrium exchange rate

Tip

Demand for pounds comes from people buying UK exports, and supply comes from UK people buying imports.

Increase in demand for pounds: the exchange rate rises.

Decrease in demand for pounds: the exchange rate falls.

Increase in supply of pounds: the exchange rate falls.

Decrease in supply of pounds: the exchange rate rises.

Four diagrams showing how shifts in the demand for and supply of pounds change the exchange rate

Figure 24: Shifts in the demand for and supply of a currency

Tip

Higher UK interest rates or more UK exports increase demand for pounds. More UK imports increase the supply.

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