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Educating Young People Who Will Be Significantly Different! Contents Teacher Notes Circular Flow Models Demand and Supply Models Production Possibility Curves Lorenz Curves Aggregate Supply and Aggregate Demand Graphs Firm Graphs Social Marginal Benefit and Social Marginal Cost Teacher Notes – ECO 06/2/1 This Economics resource is intended to assist teachers by saving them time in processing graphs, and ensuring that they have access to an accurate graph to suit a range of situations. It contains templates for 90 graphs relating to the topics listed above, and is suitable for all levels of Economics. Teachers will be able to use the graphs as is, or adjust them to suit specific teaching requirements. Copyright Statement All rights reserved. No part of publications which have the copyright statement may be reproduced, stored in a retrieval system or transmitted in any form by any means, electronic, mechanical, photocopying, recording or otherwise, without prior permission of the copyright owner – NZCETA, PO Box 95, Oamaru. Permission is given for this resource material to be reproduced by the purchaser for their own classroom use only. If any person copies any copyright materials without permission of NZCETA, then that person has infringed copyright, has broken the law and may be subject to Court proceedings. Index of Graphs Circular Flow models Circular flow model – simple Circular flow model – 2 sector Circular flow model – 3 sector (closed economy) Circular flow model – 4 sector (open economy) Circular flow model – simple with markets Circular flow model – 4 sector with markets Demand and supply models 1. Demand curves Demand curve Decrease in demand Increase in demand Increase in quantity demanded Decrease in quantity demanded 2. Supply curves Supply curve Decrease in supply Increase in supply Increase in quantity supplied Decrease in quantity supplied 3. Changes in market equilibrium Market equilibrium Path to equilibrium from an excess supply Path to equilibrium from an excess demand Market equilibrium after an increase in supply Market equilibrium after a decrease in supply Market equilibrium after an increase in demand Market equilibrium after a decrease in demand 4. Labour market supply and demand Labour market equilibrium Labour market disequilibrium – excess supply = involuntary unemployment Labour market equilibrium after an increase in demand Labour market equilibrium after a decrease in demand Labour market equilibrium after an increase in supply Labour market equilibrium after a decrease in supply 5. Forex market supply and demand Foreign exchange market Increased demand in forex market an appreciation Decreased demand in forex market a depreciation Decreased supply in forex market an appreciation Increased supply in forex market a depreciation Effect of exchange rate changes on imports Effect of exchange rate changes on exports © NZCETA Curriculum & Membership Services Page 1 of 22 ECO 06/2/1 6. International trade supply and demand 2 Country Supply and Demand Price-taking importer Price-taking exporter 7. Sales taxes and subsidies and supply and demand Sales taxes Subsidies Production possibility curves Production possibility diagram PPC showing an increase in production from unemployment to full employment PPC showing an unemployment or under-utilisation of resources/technology PPC showing an increase in productive capacity PPC showing a decrease in productive capacity PPC showing a resource / technology change increasing productive capacity of ONE good PPC showing a resource / technology change decreasing productive capacity of ONE good PPC showing basis for trade Lorenz curves Lorenz curve Lorenz curve showing increased inequality Lorenz curve showing decreased inequality Lorenz curve and gini coefficient Equity efficiency trade off Aggregate Supply and Aggregate Demand Graphs Aggregate Demand Aggregate Supply AS-AD equilibrium Inflationary gap Deflationary (Recessionary) gap Demand pull inflation Cost push inflation AS-AD showing a TIGHT monetary policy (ie increasing the OCR) AS – AD showing a CONTRACTIONARY fiscal policy (eg running an operating surplus) AS – AD showing the effect of a depreciating $NZ Firm Graphs 1. Perfect competition Long run equilibrium for a Perfectly competitive firm Perfectly competitive firm making SUPER-NORMAL profit Perfectly competitive firm making SUB-NORMAL profit Perfectly competitive firm making NORMAL profit Moving from SR super-normal profit to LR equilibrium Moving from SR sub-normal profit to LR equilibrium Breakeven and shut down points © NZCETA Curriculum & Membership Services Page 2 of 22 ECO 06/2/1 2. Monopoly Profit maximising output level for a monopoly Justifying the profit maximisation position Monopoly making super-normal profit Monopoly making sub-normal profit Monopoly making normal profit Natural monopoly Social marginal benefit and social marginal cost Social equilibrium Negative externality of production Positive externality of production Negative externality of consumption Positive externality of consumption Market for a Public good © NZCETA Curriculum & Membership Services Page 3 of 22 ECO 06/2/1 Circular Flow models Circular flow model – simple Circular flow model – 2 sector C= Consumption FINANCIAL SECTOR I= All banks + other financial institutions (loans for) investment G+S C= S= Consumption Saving HOUSEHOLDS All consumers and resource owners PRODUCERS All firms HOUSEHOLDS PRODUCERS All consumers and resource owners All firms Factors of production Y= Income Y= Income Real flows Money flows Money flows Circular flow model – 3 sector (closed economy) Circular flow model – 4 sector (open economy) FINANCIAL SECTOR All banks + other financial institutions I= (loans for) Investment C= Consumption S= FINANCIAL SECTOR All banks + other financial institutions I= (loans for) Investment Saving HOUSEHOLDS All consumers and resource owners X= M= IT = Indirect taxes PRODUCERS All firms HOUSEHOLDS All consumers and resource owners PRODUCERS All firms IT = Indirect taxes G= Govt spending GOVERNMENT SECTOR All central + local govt organisations T= Direct taxes Tr = Transfers T= Direct taxes Tr = Transfers Y= Income Money flows Money flows Y= Income Circular flow model – simple with markets G OODS + S ERVICES M ARKET sets the price of G+S Circular flow model – 4 sector with markets F INANCIAL M ARKET -sets the interest rate I = (loans for) investment G+S FOREIGN EXCHANGE M ARKET - sets the exchange rate S = Saving HOUSEHOLDS All consumers and resource owners Export receipts Import payments G= Govt spending GOVERNMENT SECTOR All central + local govt organisations C= Consumption OVERSEAS SECTOR Firms + consumers overseas C= Consumption S= Saving PRODUCERS All firms consumer expenditure= C HOUSEHOLDS All consumers and resource owners G OODS + SERVICES M ARKET - sets the price of G+S G + S= Goods + services PRODUCERS All firms It= Indirect tax X = export receipts M = import payments OVERSEAS SECTOR G = government spending Factors of production R ESOURCE M ARKET sets factor incomes eg wages Y= Income GOVERNMENT SECTOR T = direct taxation Tr = transfers Real flows Money flows Factors of production RESOURCE M ARKET - sets factor incomes eg. wages © NZCETA Curriculum & Membership Services Page 4 of 22 Real flows Money flows Y= income ECO 06/2/1 Demand and supply models 1. Demand curves Demand curve Decrease in demand $ $ P* P* D D D1 Q* Q1 Q Increase in demand Q* Q Increase in quantity demanded $ $ P* P* P1 D D1 D Q* Q* Q1 Q Q1 Quantity Decrease in quantity demanded $ P1 P* D Q1 Q* Quantity © NZCETA Curriculum & Membership Services Page 5 of 22 ECO 06/2/1 2. Supply curves Supply curve Decrease supply Price Price S1 S P* S P* Q* Q1 Quantity Increase in supply Q* Quantity Increase in quantity supplied Price Price S S S1 P1 P* P* Q* Q1 Quantity Q* Q1 Quantity Decrease in quantity supplied Price S P* P1 Q1 Q* Quantity © NZCETA Curriculum & Membership Services Page 6 of 22 ECO 06/2/1 3. Changes market equilibrium Market equilibrium Path to equilibrium from an excess supply $ $ S 16 e 12 surplus XS 14 e 12 P 14 P S 16 P 10 10 8 8 D D 6 6 0 0 10 20 30 40 50 60 70 80 90 100 10 Qe $ XD 50 60 Q 70 80 90 e 100 Quantity D Q S $ S 16 14 P 40 Market equilibrium after an increase in supply S 16 e 30 Q Path to equilibrium from an excess demand P 20 Quantity 14 12 e P 10 1 12 S1 10 P shortage 8 8 D D 6 6 0 0 10 20 30 40 50 Q 60 70 80 90 e QS 100 10 20 30 40 50 Quantity Q QD Market equilibrium after a decrease in supply 60 e 70 Q 80 90 100 Quantity 1 Market equilibrium after an increase in demand 1 S $ $ S 16 1 P P 14 e P S 16 1 14 12 e P 10 12 1 D 10 8 8 D 6 D 6 0 0 10 20 30 Q 40 1 50 Qe 60 70 80 90 100 10 Quantity © NZCETA Curriculum & Membership Services Page 7 of 22 20 30 40 50 Qe 60 70 Q 80 1 90 100 Quantity ECO 06/2/1 Market equilibrium after a decrease in demand $ S 16 14 e 12 1 10 P P 8 D 6 D1 0 10 20 30 Q1 40 50 Qe 60 70 80 90 100 Quantity © NZCETA Curriculum & Membership Services Page 8 of 22 ECO 06/2/1 4. Labour market supply and demand Labour market disequilibrium – excess supply = involuntary unemployment Labour market equilibrium Real Wage Rate ($) SL Real Wage Rate ($) SL w/p1 w/p* w/p* DL DL If at the EQUILIBRIUM quantity all workers willing + able have jobs so no INVOLUNTARY U = FULL EMPLOYMENT Q of Labour QL Q of Labour Number of workers EMPLOYED Q MAX Labour market equilibrium after an increase in demand Real Wage Rate ($) Labour market equilibrium after a decrease in demand Real Wage Rate ($) SL 1 w/p w/p* w/p* 1 w/p DL DL QL QL Q Max Number of workers VOLUNTARILY UNEMPLOYED Number of workers INVOLUNTARILY UNEMPLOYED SL DL 1 DL 1 Q of Labour Labour market equilibrium after an increase in supply QL 1 1 QL Q of Labour Labour market equilibrium after a decrease in supply SL Real Wage Rate ($) SL SL 1 Real Wage Rate ($) w/p* 1 w/p 1 w/p w/p* SL DL QL QL 1 1 DL Q of Labour © NZCETA Curriculum & Membership Services Page 9 of 22 QL 1 QL Q of Labour ECO 06/2/1 5. Forex market supply and demand Foreign exchange market Exchange rate Increased demand in forex market an appreciation NZ FOREX MARKET S $NZ = comes from people needing forex ie. all outflows from NZ’s B of P eg. import payments NZ Exchange rate eg. $1 NZ =$Aus 0.90 NZ Exchange rate NZ FOREX MARKET S $NZ $1 NZ =$Aus 1.00 1 e D $1 NZ =$Aus 0.90 D $NZ = comes from people with forex wanting NZ $ ie. all inflows into NZ’s Bof P eg. export receipts D $NZ An increase in the value of the NZ exchange rate = APPRECIATION Q $NZ / forex Q $NZ / forex Decreased demand in forex market a depreciation NZ Exchange rate A decrease in the value of the NZ exchange rate = DEPRECIATION $NZ Decreased supply in forex market an appreciation NZ Exchange rate NZ FOREX MARKET S $NZ NZ FOREX MARKET 1 S S $NZ $NZ $1 NZ =$Aus 1.00 $1 NZ =$Aus 0.90 $1 NZ =$Aus 0.90 $1 NZ =$Aus 0.80 D $NZ 1 D $NZ Q $NZ / forex An increase in the value of the NZ exchange rate = APPRECIATION D $NZ Q $NZ / forex Increased supply in forex market a depreciation NZ Exchange rate A decrease in the value of the NZ exchange rate = DEPRECIATION NZ FOREX MARKET S $NZ 1 $1 NZ =$Aus 0.90 S $NZ $1 NZ =$Aus 0.80 D $NZ Q $NZ / forex © NZCETA Curriculum & Membership Services Page 10 of 22 ECO 06/2/1 Effect of exchange rate changes on imports NZ Import Market S S$NZ $1US EXCHANGE RATE Forex Market $NZ 2.50 $NZ 2.00 D$NZ $NZ 1.50 Q$NZ D M M Effect of exchange rate changes on exports NZ Export Market S $NZ $1US D $NZ EXCHANGE RATE Forex Market S $NZ 2.50 $NZ 2.00 $NZ 1.50 Q$NZ D X X © NZCETA Curriculum & Membership Services Page 11 of 22 ECO 06/2/1 6. International trade supply and demand 2 Country Supply and Demand NZ Aussie P P D S S PBT X PW M D PBT QCAT QBT QPAT QPAT QBT Q QCAT Q QCAT = Quantity consumed domestically after trade QPAT = Quantity produced domestically after trade QBT = Quantity consumed and produced domestically before trade PW= Domestic price after trade (Note that PW is the same in BOTH countries) PBT= Domestic price before trade X = Quantity exported M = Quantity imported Price-taking importer NZ World Market P P S S PBT PW M D D QTRADED Q QPAT QBT QCAT Q QCAT = Quantity consumed domestically after trade QPAT = Quantity produced domestically after trade QBT = Quantity consumed and produced domestically before trade PW= World price after trade (Note NZ buys at PW as it is a price-taker [too small to influence the price ] in this market) PBT= Domestic price before trade M = Quantity imported © NZCETA Curriculum & Membership Services Page 12 of 22 ECO 06/2/1 Price-taking exporter NZ World Market P P S S X PW PBT D D QTRADED Q QCAT QBT QPAT Q QCAT = Quantity consumed domestically after trade QPAT = Quantity produced domestically after trade QBT = Quantity consumed and produced domestically before trade PW= World price after trade (Note NZ buys at PW as it is a price-taker [too small to influence the price ] in this market) PBT= Domestic price before trade X = Quantity exported © NZCETA Curriculum & Membership Services Page 13 of 22 ECO 06/2/1 7. Sales taxes and subsidies and supply and demand Sales Tax Sales tax P Stax Ptax = the revenue earned by govt from the tax ie. = Ptax – Ppr X Qtax S Vertical distance between the 2 supply curves is the per unit amount of tax ie P tax - P pr P* Ppr D Qtax Q* Ppr= price producer receives after the tax Ptax= price consumers pay after the tax Q Note the price increase DOESN’T = the $ amount of tax ie. Producers absorb some of its cost Subsidy P Subsidy S Ppr Ssub P* = the amount paid by govt for the subsidy ie. = P pr –P sub X Q sub Vertical distance between the 2 supply curves is the per unit amount of subsidy ie P pr - P sub Psub D Q* Qsub Ppr= price producer receives after the subsidy Psub= price consumers pay after the subsidy Q Note the price increase DOESNT = the $ amount of subsidy ie. Producers pass some of it on to consumers © NZCETA Curriculum & Membership Services Page 14 of 22 ECO 06/2/1 Production possibility curves Production possibility diagram Consumer goods PPC showing an increase in production from unemployment to full employment Curve shows the possible production combinations if resources and technology are fully utilised Consumer goods B A Capital goods Capital goods PPC showing an unemployment or underutilisation of resources/technology Consumer goods X shows the possible production combination that does NOT fully utilised resources and technology PPC showing an increase in productive capacity Consumer goods Capital goods Capital goods PPC showing an decrease in productive capacity Consumer goods PPC showing a resource / technology change increasing productive capacity of ONE good Consumer goods Capital goods Capital goods PPC showing a resource / technology change decreasing productive capacity of ONE good PPC showing basis for trade Bottles England of wine Specialize Imports B Key Portugal Exports Consumer goods Bottles of wine B CPC PPC Potential gains from trading A A Exports Bolts of cloth Imports Bolts of cloth Capital goods © NZCETA Curriculum & Membership Services Page 15 of 22 ECO 06/2/1 Lorenz curves 100% 100% Cumulative % of income Lorenz curve showing increased inequality Cumulative % of income Lorenz curve Lorenz curve A Lorenz curve A Lorenz curve B 0% Cumulative % of households Lorenz curve showing decreased inequality Cumulative % of households 100% Lorenz curve and gini coefficient income 100 % of income Cumulative % of income 100% Cumulative % of households Gini coefficient = ratio of A to A+B complete equality occurs when A = 0 complete inequality occurs when B = 0 A A B Lorenz curve B 0 Lorenz curve A 0% 0% 100% % of households 100 100% Equity efficiency trade off Equity / efficiency trade-off Equity / Equality Policies to improve equity result in a loss of economic efficiency Efficiency © NZCETA Curriculum & Membership Services Page 16 of 22 ECO 06/2/1 Aggregate Supply and Aggregate Demand Graphs Aggregate Demand Aggregate Supply AS PL PL PL1 PL2 PL2 PL1 AD Y1 Y2 Y1 Y (= Real GDP) Y (= Real GDP) Y2 FULL Y AS-AD equilibrium Inflationary Gap PL PL AS AS Inflationary Gap PL* AD PL* AD Y* = YF Real GDP YF Y* Real GDP Deflationary (Recessionary) Gap PL Deflationary Gap AS \ PL* AD Y* YF Real GDP © NZCETA Curriculum & Membership Services Page 17 of 22 ECO 06/2/1 Demand pull inflation Cost push inflation AS AS1 AS PL1 PL1 PL PL AD1 AD AD Real output AS-AD showing a TIGHT monetary policy (ie. increasing the OCR) Real output AS – AD showing a CONTRACTIONARY fiscal policy (eg. running an operating surplus) Price Level PL AS AS AS1 PL* AD PL* 1 PL PL1 AD1 AD AD1 Y1 Y* Y FULL Real Output Y1 Y* Y full Real Output AS – AD showing the effect of a depreciating $NZ PL AS1 AS PL1 PL* AD1 AD Y*Y1 Y FULL Real Output © NZCETA Curriculum & Membership Services Page 18 of 22 ECO 06/2/1 Firm Graphs 1. Perfect competition Long run equilibrium for a Perfectly competitive firm Perfectly competitive firm making SUPERNORMAL profit Super -normal Profit when AR >AC at Q* Revenue / Cost ($) $ MC MC AC AC AR at Q* Pc D=AR=(MR) D AC at Q* Q* Q Qc Remember MC must cut AC at AC min Perfectly competitive firm making SUBNORMAL profit Revenue / Cost ($) Perfectly competitive firm making NORMAL profit Sub -normal Profit when AC >AR at Q* Revenue / Cost ($) MC Output Normal Profit when AR = AC at Q* MC AC AC AC at Q* AR at Q*= AC at Q* D AR at Q* D = AR Remember MC must cut AC at AC min Remember MC must cut AC at AC min Q* Q* Output Output Moving from SR super-normal profit to LR equilibrium The Firm $ The Market $ MC S S1 AC Pc D=AR=(MR) Pc1 D1=AR=(MR) P0 P1 D Qc1 Qc Q Q0 © NZCETA Curriculum & Membership Services Page 19 of 22 Q1 Q ECO 06/2/1 Moving from SR sub – normal profit to LR equilibrium AC The Firm $ 1 $ MC 1 c The Market S S 1 P D =AR=(MR) P10 Pc D=AR=(MR) P0 D Qc Q1c Q 1 Q0 Q Q0 Breakeven and shut down points Breakeven point ([AR=]P=/<AC) Price MC AC AVC PBE BE D =AR PSD D1=AR SD Shutdown point ([AR=]P =/<AVC) QSD QBE © NZCETA Curriculum & Membership Services Page 20 of 22 Output ECO 06/2/1 2. Monopoly Profit maximising output level for a monopoly Justifying the profit maximisation position Revenue / Cost ($) Revenue / Cost ($) MC MC MC > MR D = AR =MR MR > MC MR Q* Q1 Q* Q2 Output Output Profit max Q* = Profit maximizing output level At Q1 MR > MC and so missing out on some marginal profits (ie. RED area) and thus not at maximum total profit position At Q2 MC > MR and so making marginal losses (ie. BLUE area) that decrease total profit and thus not at maximum total profit position Monopoly making super-normal profit Monopoly making sub-normal profit Cost / revenues Cost / revenues AC MC MC AC at Qm AC AR = Pm AR = Pm AC at Qm D = AR D = AR Output Output Qm Qm MR MR Monopoly making normal profit Natural monopoly Cost / revenues Cost / revenues MC AC AC at = AR = Pm Qm PNM c E b h D = AR Output Qm LRAC E* PPC a MR MC D = AR QNM QPC Output MR © NZCETA Curriculum & Membership Services Page 21 of 22 ECO 06/2/1 Social marginal benefit and social marginal cost Social equilibrium Negative externality of production Negative Production Externality Social equilibrium (where SMC = SMB) SMC/ SMB SMC MC/ MB The deadweight loss triangle shows the amount of welfare loss due to over production of this product at QFM SMC PMC Vertical gap between SMC and PMC = the cost of production on third parties when producing QFM output ie -ve spillover cost PS P* PFM SMB PMB =SMB Q* Output QS Positive externality of production Negative Consumption Externality MC / MB PMC Vertical gap between SMC and PMC = the benefits received by third parties of consuming QFM output ie +ve spillover benefits PS The deadweight loss triangle shows the amount of welfare loss due to over consumption of this product at QFM PMC = SMC SMC Vertical gap between SMB and PMB = the cost on third parties when consuming QFM output ie -ve spillover cost of consumption PS The deadweight loss triangle shows the amount of welfare loss due to under consumption of this product at QFM PFM PFM PMB SMB PMB =SMB QS QFM QS Positive Consumption Externality Vertical gap between SMB and PMB = the benefits received by third parties of consuming Q FM output ie. +ve spillover benefits QFM Output Output Positive externality of consumption MC/ MB Output Negative externality of consumption Positive Production Externality MC/ MB QFM Market for a Public good Costs/ Benefits 20 -PMC = SMC The deadweight loss triangle shows the amount of welfare loss due to under consumption of this product at Q FM PFM PS 15 -- DWL at QFM 10 -SMC SMB 5 -- PMB 0 QFM SMB QFM QS Output Qs output SMC = 0 as public goods are non – depletable QFM = 0 as public goods are non – excludable by price © NZCETA Curriculum & Membership Services Page 22 of 22 ECO 06/2/1