Important Diagrams Ib Economics

Important diagrams with tips on how to use them
Important diagrams with tips on how to

use them
Every diagram you need to know for your IB exams is listed in the IB Economics syllabus. Each of these diagrams
is also explained in the learning objectives appearing at the beginning of each section of the coursebook.
These diagrams are reproduced here by chapter so that you can easily refer to all of them for review. They include
all the diagrams that appear in the IB economics syllabus. The tip given under each diagram tells you what you
should be able to illustrate by use of these diagrams.
Unit 1 Introduction to economics

Chapter 1 The foundations of economics
40 A
B G
35
30
microwave ovens
C
25
20
F D
15
10
5
E
0 5 10 15 20 25 30 35 40
computers
Figure 1.1: Production possibilities curve
TIP
This diagram illustrates choice, opportunity cost and unemployment of resources.
a Increasing opportunity costs b Constant opportunity costs

microwave ovens
basketballs
computers volleyballs
Figure 1.2: Production possibilities curve with increasing and constant opportunity costs
TIP
This illustrates the difference between constant and increasing opportunity costs.
1 Economics for the IB Diploma - Tragakes © Cambridge University Press 2020

ECONOMICS FOR THE IB DIPLOMA: COURSEBOOK
a
Economic growth Y Y b
Economic growth
as an increase as an increase
in actual output in production
possibilities caused
caused by C by increases in
reductions in B B resource quantities
unemployment A or improvements in
A resource quality
and inefficiency in
production
0 0
X PPC1 PPC2 PPC3 X
Y Y
c
Decrease in d
Non-parallel shifts of
production the PPC
possibilities
PPC2 PPC1 PPC1 PPC2

0 X 0 X
Figure 1.3: Using the production possibilities model to illustrate economic growth
TIP
This diagram illustrates the difference between actual growth and growth in production possibilities.
factor incomes
households (wages, rents, interest, profit) firms

(consumers) (businesses)
consumer expenditure
(spending on go
ods and services)
t
savi en
ding
ng tm
financial markets
in ve s
rts
en
sp
xpo
tax
nt
es e
sp
rnm
ne
government
en
ng gove
go
di
on d
in
im en
p ort sp
s other countries
Figure 1.6: Circular flow of income model with leakages and injections
TIP
This diagram shows the interdependence between households and firms, along with financial
markets (banks), the government and other countries. It also shows the role of leakages from and
injections into the flow of income.

Unit 2 Microeconomics
Chapter 2 Competitive markets: Demand and supply
a A
movement along the demand curve, caused by a b
A shift of a demand curve, caused by a change in a
change in price, is called a ‘change in quantity demanded’ determinant of demand, is called a ‘change in demand’
P P
change in demand
A change in
P1 quantity decrease increase
demanded in D in D
B
P2 D2
D D3 D1
0 Q1 Q2 Q 0 Q
Figure 2.4: Movements along and shifts in the demand curve
TIP
Part (a) shows the downward sloping demand curve illustrating the law of demand. It also illustrates
movements along the demand curve: as P falls from P1 to P2, quantity demanded increases from Q1
to Q2. Part (b) shows that if there is any change in a non-price determinant of demand, the demand
curve will shift.
a
A movement along the supply curve, caused by a b
A shift of the supply curve, caused by a change in a
change in price, is called a ‘change in quantity supplied’ determinant of supply, is called a ‘change in supply’
P P
S S3 S1
S2
B decrease increase
P2 in supply in supply
change in
A quantity P1
P1 supplied
0 Q1 Q2 Q 0 Q3 Q1 Q2 Q
Figure 2.8: Movements along and shifts of the supply curve
TIP
Part (a) shows the upward sloping supply curve illustrating the law of supply. It also illustrates
movements along the supply curve: as P increases from P1 to P2, quantity supplied increases from Q1
to Q2. Part (b) shows that if there is any change in a non-price determinant of supply, the supply curve
will shift.

price of chocolate bars ($)
S
5 surplus
4
equilibrium market
3 price equilibrium
2
shortage D
1
equilibrium quantity
0 2 4 6 8 10 12 14
quantity of chocolate bars
(thousands per week)
Figure 2.11: Market equilibrium
TIP
Demand and supply determine an equilibrium P and Q at market equilibrium.
a Increase in demand b Decrease in demand

final
initial equilibrium
P equilibrium S P S
c final a initial
P2 equilibrium
P1 equilibrium
b
a
P1 b P3 c
D2 D1
D1 D3
0 Q1 Q2 Q 0 Q3 Q1 Q
Figure 2.12: Changes in demand and the new equilibrium price and quantity
TIP
If demand changes, there is a new market equilibrium due to the creation of shortages or surpluses.
a Increase in supply b Decrease in supply

initial S1 final S3
equilibrium equilibrium
P P
S2 S1
P1 a b P3 c
c final b a
P2 P1 initial
equilibrium equilibrium
D
D
0 Q1 Q2 Q 0 Q3 Q1 Q
Figure 2.13: Changes in supply and the new equilibrium price and quantity

TIP
If supply changes, there is a new market equilibrium due to the creation of shortages or surpluses.
a Adjustment of price to increased demand
P S
C
P2
A B
P1
D2
shortage =
D1 excess demand
0 Q1 Q3 Q2 Q
Figure 2.16a: Price as a signal and incentive
TIP
This diagram shows the signalling and incentive functions of price in allocating and reallocating
resources.
P1 S = MC
P2
Allocative
P3 consumer efficiency:
surplus at market
Pe equilibrium
producer MB = MC and
surplus social surplus
P4 is maximum
P5
P6 D = MB
0 Qa Qb Qe Q
Figure 2.17: Consumer and producer surplus in a competitive market
TIP
This diagram shows that consumer surplus and producer surplus are maximum at competitive
market equilibrium, therefore social surplus (consumer surplus + producer surplus) is also maximum.

Chapter 3 Elasticities
Frequently encountered cases
a Price inelastic demand: 0 < PED <1 b Price elastic demand: 1< PED < ∞
P P
P2
5% P1
P2
10%
P1
D
D
0 Q2 Q1 Q 0 Q2 Q1 Q
5% 10%
Special cases
c Unit elastic demand: PED = 1 d Perfectly inelastic demand: PED = 0 e Pefectly elastic demand: PED = ∞
P P D P
D
P2 P1
5%
P1
D
0 Q2 Q1 Q 0 Q1 Q 0 Q
5%
Figure 3.1: Demand curves and PED
TIP
Parts (a) and (b) show that the flatter the demand curve, the more elastic the demand. Parts (c), (d)
and (e) show the special cases where PED is constant along the full range of the demand curve.

P ($)
elastic portion of
50 demand curve
45 f PED = 4
e
40
35 inelastic portion
d PED = 1 of demand curve
30
25 c
20
15 b PED = 0.25
10 a
5
0 10 20 30 40 50 60 70 80 90 100
units of good A
Figure 3.4: (HL only) Variability of PED along a straight-line demand curve
TIP
This diagram shows that the value of PED decreases as we move down the demand curve.
a PED > 1 (elastic demand) b PED < 1 (inelastic demand) c PED = 1 (unit elastic demand)
P P P
$ $
P2 = 5
C P2 = 7
P1 = 4 P2
C
P1 = 5 C
A D P1
B
A B D
D A B
0 Q2 = 8 Q1 = 11 Q (Units) 0 Q2 = 12 Q1 = 14 Q (Units) 0 Q2 Q1 Q
Figure 3.6: PED and total revenue
TIP
These diagrams show how a firm’s total revenue changes in response to changes in price depending
on whether PED>1, PED<1 or PED=1.

Engel curve
450 E
400 YED < 0
inferior food
Income per week ($)
350 D
YED = 0
250 C
YED < 1
necessity
150 YED > 1
luxury or service B
100
A
0 4 7 8 9
Q of hot dogs per week
Figure 3.10: The Engel curve showing different YEDs
TIP
The Engel curve is used to show how income elasticity of demand (YED) changes as income
increases; it can be used to show if a good is normal or inferior, and a necessity or luxury (or service).
Frequently encountered cases

a Price inelastic supply: PES < 1 b Price elastic supply: PES > 1
P P
S
S
P2 P2
10% 10%
P1 P1
0 Q1 Q2 Q 0 Q1 Q2 Q
5% 15%
Special cases
c Unit elastic supply: PES = 1 d Perfectly inelastic supply: PES = 0 e Perfectly elastic supply: PES = ∞
P S1 P S P
S2
S3 P1 S
0 Q 0 Q1 Q 0 Q
Figure 3.13: Supply curves and PES
TIP
Parts (a) and (b) show relatively inelastic and elastic supply, depending on which axis intersects the
supply curve. Parts (c), (d) and (e) show the special cases where PES is constant along the full range
of the supply curve.

Chapter 4 Government intervention in microeconomics

P
S
Pe
Pc
shortage =
D
excess demand
0 Qs Qe Qd Q
Figure 4.1: Price ceiling (maximum price) and market outcomes
TIP
This illustrates a price ceiling; it results in a shortage of the good.
a
Consumer and producer surplus in a competitive b
Welfare impacts of a price ceiling
free market: maximum social surplus (maximum price)
P P
S = MC
welfare loss S = MC
consumer a
surplus b
Pe Pe
producer c d
surplus Pc
e
D = MB D = MB
0 Qe Q 0 Qs Qe Qd Q
Figure 4.2: Effects of a price ceiling (maximum price) on consumer and producer surplus
TIP
Part (b) shows the loss of consumer and producer surplus, which is compared to maximum social
surplus in part (a). It can also be used to illustrate the effects of the price ceiling on consumers,
producers, workers and government.

P
excess supply = S
surplus
Pf
Pe
0 Qd Qe Qs Q
Figure 4.5: Price floor (minimum price) and market outcomes
TIP
This illustrates a price floor; it results in a surplus of the good.
a
Consumer and producer surplus in a competitive free b Welfare impacts of a price floor (minimum price)
market: maximum social surplus
P
P excess supply =
surplus
S = MC S = MC
a
consumer Pf
b f
surplus Pe c
P* D+
producer e g
d government
surplus welfare
purchases
loss
D = MB D = MB
0 Qd Qe Qs Q
0 Q* Q
Figure 4.7: Welfare impacts of a price floor (minimum price) for agricultural products and government purchases of
the surplus
TIP
Part (b) shows the loss of consumer and producer surplus, which is compared to maximum social
surplus in part (a). It can also be used to illustrate the effects of the price ceiling on consumers,
producers, workers and government.

a How the supply curve shifts b Market outcomes due to an indirect tax
P S2 (= S1 + tax) P government S2 (= S1 + tax)
revenue
S1 tax per
unit S1
Pc
P*
Pp
0 Q
D
0
Qt Q* Q
Figure 4.11: Supply curve shifts due to an indirect tax
TIP
Part (a) shows how the supply curve shifts when an indirect tax is imposed. Part (b) illustrates the
market outcomes and consequences for stakeholders.
a
Consumer and producer surplus in a competitive b C
onsumer and producer surplus with an indirect tax:
free market: maximum social surplus welfare loss
P P
S2 = S1 + tax
consumer tax per S1 = MC

S = MC surplus after unit
the tax
Pc
consumer government a
surplus P* revenue from
welfare loss = a + b
the tax b
P* Pp
producer producer surplus
surplus after the
tax
D = MB
D = MB
0 0 Qt Q* Q
Q* Q
Figure 4.12: Effects of indirect taxes on consumer and producer surplus
TIP
Part (b) shows the loss of consumer and producer surplus (welfare loss) due to the indirect
tax, compared to part (a). It can also be used to show the market outcomes consequences for
stakeholders.

S1
P
Pp subsidy
per unit
P* S2 = S1 – subsidy
Pc
D
0 Q* Qsb Q
Figure 4.15: Impacts of subsidies on market outcomes
TIP
The diagram illustrates the market outcomes and consequences for stakeholders.
a C
onsumer and producer surplus in a competitive free b
Consumer and producer surplus with a subsidy:
market: maximum social surplus welfare loss
P
P
S1 = MC
S = MC
subsidy per unit
Pp gain in
producer surplus S2 = S1 – subsidy
consumer P* a
gain in
surplus consumer surplus
P* Pc welfare loss
producer
surplus
D = MB D = MB
0 Q* Q 0 Q* Qsb Q
Figure 4.16: Effects of subsidies on consumer and producer surplus
TIP
Part (b) shows the gain of consumer and producer surplus due to the subsidy, as well as welfare
loss, compared to part (a). It can also be used to show the market outcomes consequences for
stakeholders.

Chapter 5 Market failure and socially undesirable outcomes I:

Common pool resources and negative externalities
P
S = MPC = MSC
Popt
D = MPB = MSB
0 Qopt Q
allocative efficiency
is achieved
Figure 5.2: Demand, supply and allocative efficiency with no externalities
TIP
This diagram shows that when there are no externalities, the free market achieves allocative efficiency,
producing the socially optimum output, where MSB = MSC and social surplus is maximum.
MSC
P external
cost
S = MPC
Popt
Pm
D = MPB = MSB
0 Qopt Qm Q
Figure 5.3: Negative production externality
TIP
This shows the external costs and resource misallocation resulting from a negative production externality.

MSC
P
external
cost S = MPC
Popt
Pm welfare loss
D = MPB = MSB
0 Qopt Qm Q
Figure 5.4a: Welfare loss in a negative production externality
TIP
The welfare loss is the shaded area between Qopt and Qm on the horizontal axis with the point of the
triangle pointing to Qopt.
MSC = MPC + tax

P tax = external cost
Pc = Popt S = MPC
Pm
Pp
D = MPB = MSB
0 Qopt Qm Q
Figure 5.5a: Imposing an indirect tax on output or on pollutants
TIP
This diagram shows how a Pigouvian tax on output or a carbon tax can be used to correct the externality.
P S of tradable
permits
P2
P1 D2
D1
0 Q1 Q
Figure 5.5c: Tradable permits
TIP
This shows how a market for tradable permits works.

MSC
P
S = MPC
Popt
Pm
D = MPB = MSB
0 Qopt Qm Q
Figure 5.7: Government regulations to correct negative production externalities and promote sustainable use of
common pool resources
TIP
This diagram shows the effects on the market of government regulations to correct the externality.
P
S = MPC = MSC
Pm
Popt D = MPB
external
cost
MSB
0 Qopt Qm Q
Figure 5.9: Negative consumption externality
TIP
This shows the external costs and resource misallocation resulting from a negative consumption externality.
S = MPC = MSC
welfare loss
Pm external
cost
Popt
D = MPB
MSB
0 Qopt Qm Q
Figure 5.10a: Welfare loss in a negative consumption externality
TIP
The welfare loss is the shaded area between Qopt and Qm on the horizontal axis with the point of the

a Market-based: imposing an indirect tax b Government regulations and advertising

P P + tax
MPC P
MPC + tax P
external
tax = tax external
= cost
cost
external
external
cost cost
Pc Pc S = MPC = MSC S = MPC = MSC
S = MPC = MSC S = MPC = MSC
Pm Pm Pm Pm
Pp Pp
D = MPB D = MPB D1 = MPB D1 = MPB
Popt Popt
MSB MSB D2 = MSB D2 = MSB
after demand decreases after demand decreases
0 Qopt Qm 0 Q Qopt Qm 0 QQopt Qm 0 Q Qopt Qm Q
Figure 5.11: Correcting negative consumption externalities
TIP
Part (a) shows how a Pigouvian tax can be used to correct the externality. Part (b) shows the effects
on the market of government regulations and advertising to correct the externality.
Chapter 6 Market failure and socially undesirable outcomes II:

Positive externalities, public goods, asymmetric information
and inability to achieve equity
S = MPC
P
external
benefits
MSC
Pm
Popt
D = MPB = MSB
0 Qm Qopt Q
Figure 6.1: Positive production externality
TIP
This shows the external benefits and resource misallocation resulting from a positive production
externality

P
S = MPC
external
benefits
MSC
Pm
Popt welfare loss
D = MPB = MSB
0 Qm Qopt Q
Figure 6.2a: Welfare loss in a positive production externality
TIP
The welfare loss is the shaded area between Qm and Qopt on the horizontal axis with the point of the
a Direct government provision b Granting a subsidy

S = MPC
P P S = MPC
spillover
benefit
MSC subsidy =
Pm spillover benefit
Pm MSC
Popt
Popt
D = MPB D = MPB
0 Qm Qopt Q 0 Qm Qopt Q

Figure 6.3: Correcting positive production externalities
TIP
This figure shows how this externality can be corrected through: part (a) direct government
provision, and part (b) subsidies.

P
S = MPC = MSC
Popt
Pm MSB
external
benefit
D = MPB
0 Qm Qopt Q
Figure 6.4: Positive consumption externality
TIP
This shows the external benefits and resource misallocation resulting from a positive consumption
externality.
S = MPC = MSC
welfare loss
Popt
external
Pm benefits
MSB
D = MPB
0 Qm Qopt Q
Figure 6.5a: Welfare loss in a positive consumption externality
TIP
The welfare loss is the shaded area between Qm and Qopt on the horizontal axis with the point of the

a Legislation or advertising b

Direct government provision
P P S = MPC = MSC
S = MPC = MSC
S + government
provision
Popt
Pm D2 = MSB
Pm
external
benefit Pc MSB
D1 = MPB D = MPB
0 Qm Qopt Q 0 Qm Qopt Q

c Granting a subsidy
P S = MPC = MSC
subsidy = MPC –
external subsidy
benefit
Pm
Pc MSB
D = MPB
0 Qm Qopt Q
Figure 6.6: Correcting positive consumption externalities
TIP
Legislation, regulations, education, awareness creation and nudges have effects shown in part (a). The
effects of direct government provision are shown in part (b). The effects of subsidies are in part (c).
r ship land, lab

reneu o ur, c
rep api
en t resource tal
al, ,e
nt
pit markets re
ca me cost
so
inco fp
pr
,
ur
old ,
ages it)
ro
en
bo
h d
se t, wt, prof
e
, la
ur s
n
uc
(re eres
u
land
ho
hip
tio
t
n
in
households firms
ou
h
pe sehol s
nue
ex
nd d
itur reve
go e
es
o ic
ds product rv
an d se
d ser markets an
vice ds
s goo
Figure 6.8: (HL only) Circular flow of income model
TIP
This shows that household incomes determined in markets result in income inequalities.

Chapter 7 Market failure and socially undesirable outcomes

III: Market power (HL only)
P P
S
Pe Pe D=MR=AR
D
0 Q 0 Q
Figure 7.6: (HL only) Market (industry) demand and supply determine demand faced by the perfectly competitive firm
TIP
This diagram shows the perfectly competitive firm as price taker where P = D = MR = AR.
a Abnormal profit b Normal profit

price, revenue, costs
MC
MC
AC AC
P1 a
AC1 P1 = AR1 = MR1 = D1 P2 =
b AC2 P2 = AR2 = MR2 = D2
Q1 Q Q2 Q
c
Loss
MC AC
AC3 c
P3 d P3 = AR3 = MR3 = D3
Q3 Q
Figure 7.8: (HL only) Short-run profit maximisation in perfect competition
TIP
This diagram shows how the profit maximising firm in perfect competition maximises profit, earning
abnormal profit in part (a), normal profit in part (b) and loss in part (c).

a
The firm b
The market/industry
P
MC
S = MC
costs, revenue, P
ATC consumer
surplus
Pe Pe
P = AR = MR producer
surplus
D = MB
0 Qe Q 0 Qe Q
Figure 7.10: (HL only) Allocative efficiency in perfect competition in the long run
TIP
This diagram is used to show that when the perfectly competitive firm is in long run equilibrium it
achieves allocative efficiency given by P = MC, where at the level of the industry social surplus is
maximum and MB = MC.
a
abnormal profit b
normal profit c
loss
abnormal AC
profit losses MC
price, costs, revenue
MC MC AC
Pe Pe
AC Pe
D = AR D = AR D = AR
0 Qe Q 0 Qe Q 0 Qe Q
MR
MR MR
Figure 7.14: (HL only) Profit maximisation and loss minimisation in monopoly: marginal revenue and cost approach
TIP
This shows how the monopolist maximises profit, making abnormal profit in part (a), normal profit in
part (b) and loss in part (c).
Average
costs
AC1 LRAC
AC*
0 Q1 Q* Q
Figure 7.15: (HL only) Natural monopoly
TIP
This shows natural monopoly producing for the entire market when LRAC is still falling.

S = MC MC
Pm b

a a
Ppc P = MRpc Ppc
D = MB D = MB
0 Qpc Q 0 Qm Qpc Q
MRm
Figure 7.16: (HL only) Higher price, lower output by the firm in monopoly
TIP
These diagrams can be used to show how monopoly charges a higher price while producing a lower
quantity than a perfectly competitive industry.
consumer
P P surplus
S = MC MC
A C
consumer Pm
Ppc
surplus E
welfare loss
producer F
surplus D
B
producer
D = MB surplus D = MB
0 Qpc Q 0 Qm Qpc Q
MRm
Figure 7.17: (HL only) Consumer and producer surplus and welfare loss in monopoly compared with perfect competition
TIP
This shows that the monopolist’s higher price with lower quantity result in welfare loss.


MC MC
price, costs
AC AC
Pe
Pe
D
0 Qpe Q 0 Qm MR Q
at long-run equilibrium at long-run equilibrium
production takes place at production takes place at
Pe = MC (allocative efficiency) Pe > MC (allocative inefficiency)
Figure 7.18: (HL only) Allocative efficiency in perfect competition and allocative inefficiency in monopoly
TIP
The perfectly competitive firm produces Q where P = MC, indicating allocative efficiency. The
monopolist produces a Q where P>MC (or AR>MC) indicating the presence of market power.
a
Perfect competition b Monopoly c Monopolistic competition
P P P
D
D
D
0 Q 0 Q 0 Q
Figure 7.19: (HL only) Demand curves facing the firm under three market structures
TIP
The monopolistically competitive firm faces a more elastic demand curve than monopoly, being
somewhere in between monopoly and perfect competition.

a
Economic profit b Normal profit c Losses
economic
(supernormal) AC
profit losses MC

MC MC AC
Pe Pe
AC Pe
D = AR D = AR D = AR
0 Qe Q 0 Qe Q 0 Qe Q
MR
MR MR

Figure 7.20: (HL only) Short-run equilibrium positions of the firm in monopolistic competition
TIP
This shows how the monopolistically competitive firm maximises profit; there are three possible
outcomes in the short run: abnormal profit in part (a), normal profit in part (b) and loss in part (c).
MC
Pe ATC
D = AR
0 Qe Qc Q
MR
Figure 7.21: (HL only) Long-run equilibrium of the firm in monopolistic competition
TIP
This shows that in the long run the firm in monopolistic competition makes normal profit. It can
also be used to show that the firm has allocative inefficiency in long run equilibrium because at the
equilibrium level of output Qe, P>MC.
MC
a
Pe AC
profit b
D = AR
MR
0 Q max Q
Figure 7.23: (HL only) Profit maximisation by a price-fixing cartel
TIP
This is the same as the monopolist’s profit maximisation diagram where the monopolist earns
abnormal profit. It shows that the collusive oligopoly behaves like a monopoly.

Unit 3 Macroeconomics
Chapter 8 The level of overall economic activity
factor incomes
(wages, rents, interest, profit)
households firms
consumer expenditure
(spending on goods and services)
t
savi en
ng financial markets est m
ng
i n v
ndi
rts
pe
ts
o
tax
exp
en
es m
ern
sp
government gov
on
en
in
ing
g
d
on
nd
im e
p sp
ort
s
other countries
Figure 8.2: Circular flow of income model with leakages and injections
TIP
Refer to Figure 1.6, which appears under Chapter 1, which can be used here to show the
interactions between decision-makers, and that the income, output and expenditure approaches to
measuring GDP (national income accounting) are equivalent.
real GDP actually achieved

peak contraction
expansion
real GDP
peak long-term growth trend,

or potential output
(potential GDP)
trough
trough
0
time (years)
Figure 8.3: The business cycle
TIP
Illustrates short-term fluctuations of real GDP and the long-term growth trend (potential output).

Chapter 9 Aggregate demand and aggregate supply

a The aggregate demand curve b Shifts in the aggregate demand curve
price level
price level
AD AD3 AD1 AD2
0 0
real GDP real GDP
Figure 9.1: The aggregate demand (AD) curve
TIP
Part (a) shows the downward sloping aggregate demand curve; part (b) shows shifts in this curve due
to changes in any of the determinants of aggregate demand.
a The upward-sloping SRAS curve b Shifts in the SRAS curve
SRAS SRAS3 SRAS

1 SRAS
2
price level
price level
0 0
real GDP real GDP
Figure 9.2: The short-run aggregate supply curve (SRAS)
TIP
Part (a) shows the upward sloping SRAS curve; part (b) shows shifts in this curve due to changes in
any of its determinants.

SRAS
Pl1
price level
Ple
Pl2
AD
0 Ye
real GDP
Figure 9.3: Short-run macroeconomic equilibrium
TIP
Short-run macroeconomic equilibrium occurs at the point of intersection of AD with SRAS.
a Changes in aggregate demand b Changes in short-run aggregate supply
SRAS SRAS3
SRAS1
SRAS2
price level
price level
Pl2 Pl3
Pl1 Pl1
Pl3 AD2 Pl2
AD3 AD1 AD
0 Y3 Y1 Y2 0 Y3 Y1 Y2
real GDP real GDP
Figure 9.4: Impacts of changes in short-run macroeconomic equilibrium
TIP
Part (a) shows the impact on the price level and real GDP due to changes in AD; part (b) shows the
impact of changes in SRAS.

LRAS
SRAS
price level
Ple
AD
0 Y p = Ye
real GDP
Figure 9.5: The LRAS curve and long-run equilibrium in the monetarist/new classical model
TIP
This shows the LRAS curve that is vertical at the level of potential output, as well as long run
macroeconomic equilibrium that occurs when the AD and SRAS curves intersect on the LRAS curve.
a The economy with a deflationary b

The economy with an c
The economy at the full
(recessionary) gap inflationary gap employment level of output
LRAS LRAS LRAS

SRAS
SRAS
SRAS
price level
price level
price level
Ple
Ple Ple
AD
AD
AD
0 Ye Yp 0 Yp Ye 0 Yp = Ye
real GDP real GDP real GDP
Figure 9.6: Deflationary (recessionary) and inflationary gaps in relation to potential output
TIP
This shows a recessionary or deflationary gap, an inflationary gap, and full employment equilibrium
in the monetarist/new classical model

a Creating and eliminating a deflationary gap b Creating and eliminating an inflationary gap
LRAS LRAS
SRAS1 SRAS2
a
price level
price level
Pl1 a SRAS2 Pl3 c SRAS1
Pl2 b Pl2 b
Pl3 c Pl1
a
AD1 AD2
AD2 AD1
0 Yrec Yp 0 Yp Yinfl
real GDP real GDP
Figure 9.8: Automatic adjustment to long-run full employment equilibrium in the monetarist/new classical model
TIP
This can be used to illustrate how the economy automatically returns to full employment equilibrium
in the long run.
Keynesian AS
price level
section III
section II
section I
0 Yp Ymax real GDP
Figure 9.10: The Keynesian aggregate supply curve
TIP
This diagram shows the three segments that compose the Keynesian AS curve.

a Recessionary (deflationary) gap b Inflationary gap c Full employment equilibrium

Keynesian AS Keynesian AS Keynesian AS
price level
price level
price level
AD AD
AD
0 Ye Yp 0 Yp Ye 0 Yp = Ye
real GDP real GDP real GDP
Figure 9.11: Three equilibrium states of the economy in the Keynesian model
TIP
This shows a recessionary or deflationary gap, an inflationary gap, and full employment equilibrium
in the Keynesian model.
a The monetarist/new classical model b The Keynesian model

LRAS1 LRAS2 AS1 AS2
price level
price level
0 Yp1 Yp2 real GDP 0 Yp1 Yp2 real GDP
Figure 9.13: Increasing potential output, shifts in aggregate supply curves and long-term economic growth
TIP
This shows how the LRAS and Keynesian AS curve shift over the long term, illustrating growth of
potential output.

Chapter 10 Macroeconomic objectives I:

Low unemployment, low and stable rate of inflation
a M
ismatches between labour b M
inimum wage legislation and c Labour market rigidities
demand and labour supply: labour union activities lead to lead to an increase in costs
falling demand for labour higher than equilibrium wages of production, supply shifts
and lower quantity of labour to the left), causing a fall in
demanded Q produced; employers hire
P supply fewer workers
price of labour (wage)
S = supply P of
of labour labour surplus = P
labour S2
W1 unemployment
S1
W2 Wm P2
price
D1 = demand
We
P1
for labour
D2 D
0 Q demand
Q3 Q2 Q1
for
quantity of labour 0 Q2 Q1 Q
labour
0 Qd Qe Qs Q
quantity of labour
Figure 10.1: Structural unemployment
TIP
Part (a) shows a labour market illustrating unemployment that arises from falling demand for
labour in a particular industry or geographical area. Part (b) shows a labour market illustrating how
unemployment can arise from a minimum wage. Part (c) shows a product market illustrating the
effects of labour market rigidities.
LRAS Keynesian AS
SRAS
price level
price level
Pl1
Pl2 Pl1
AD1 Pl2
AD1
AD2
AD2
0 Yrec Yp 0 Yrec Yp
real GDP real GDP
Figure 10.3: Cyclical unemployment
TIP
Using the monetarist/new classical model in part (a) and the Keynesian model in part (b) this figure
shows a deflationary gap resulting in lower real GDP which gives rise to cyclical unemployment.

AS
LRAS
SRAS
price level
price level
Pl2 Pl2
Pl1
Pl1 AD2 AD2
AD1 AD1
0 Yp Yinfl 0 Yp Yinfl
real GDP real GDP
Figure 10.5: Demand-pull inflation
TIP
Using the monetarist/new classical model in part (a) and the Keynesian model in part (b), this figure
shows how an increase in aggregate demand results in a higher price level together with an increase
in real GDP; this is demand-pull inflation.
LRAS
SRAS2
SRAS1
price level
Pl2
Pl1
AD1
0 Yrec Yp
real GDP
Figure 10.6: Cost-push inflation
TIP
This figure shows how a fall in SRAS gives rise to a higher price level and lower real GDP; this is
cost-push inflation.

a Falling aggregate demand (AD) b Increasing short-run aggregate supply (SRAS)
SRAS SRAS1
SRAS2
price level
price level
Pl1 Pl1
Pl2
Pl2
AD1
AD2 AD
0 Y2 Y1 Y1 Y2
real GDP real GDP
Figure 10.8: Causes of deflation
TIP
Deflation may arise from a fall in aggregate demand, shown in part (a), or an increase in SRAS, shown in
part (b).
a The shape of the Phillips curve b

The reasoning behind the Phillips curve in terms
of the AD-AS model
SRAS
d
rate of inflation
Pl4
price level
d
c
c Pl3 AD4
b Pl2 b
a a AD3
e Pl1
AD2
AD1
0 0 Y1 Y2 Y3 Y4
unemployment rate real GDP
Figure 10.11 (HL only): The short-run Phillips curve
TIP
Part (a) illustrates the trade-of between inflation and unemployment, shown by the short-run Phillips
curve. Part (b) uses the AD-AS model to explain why the short-run Phillips curve has a downward
slope illustrating this trade-off.

a The shape of the LRPC and SRPC b

The reasoning behind the two curves in terms of
the AD-AS model
LRPC
rate of inflation
LRAS
9% c SRAS2
7% Pl3 c
price level
b SRPC2 b SRAS1
5% Pl2
a SRPC1 AD2
Pl1 a
0 3% 5%
unemployment rate AD1
5% = natural rate 0 Yp Yinfl
of unemployment real GDP
Figure 10.13: (HL only) The short-run and long-run Phillips curves
TIP
Part (a) shows two short-run Phillips curves, together with a long run Phillips curve that is vertical
at the natural rate of unemployment. Part (b) uses the AD-AS model to explain why the long-run
Phillips curve is vertical at the natural rate of unemployment.
Chapter 11 Macroeconomic objectives II: Economic growth,

sustainable level of debt
a
The monetarist /new classical model: increase in b
The Keynesian model: increase in aggregate demand
aggregate demand
Keynesian AS
SRAS
price level
Pl2
price level
Pl1
Pl3 AD2
AD3 AD1
AD1 AD2 AD3 AD4
0 Y3 Y1 Y2
real GDP 0 Y1 Y2 Y3 Yp real GDP

Figure 11.1: Short-term growth in the AD-AS model
TIP
The figure shows how increases in aggregate demand lead to short-term growth using the
monetarist/new classical model in part (a) and the Keynesian model in part (b).

a
The monetarist/new classical model b
The Keynesian model
LRAS1 LRAS2 AS1 AS2
price level
price level
0 Yp1 Yp2 real GDP 0 Yp1 Yp2 real GDP
Figure 11.2: Increasing potential output, shifts in aggregate supply curves and long-term economic growth
TIP
This figure illustrates long-term growth in the AD-AS model based on the monetarist/new classical
model in part (a) and the Keynesian model in part (b).
a
Short-term growth: growth b
Long-term growth: growth c N
egative growth:
as an increase in actual as an increase in production decrease in production
output caused by reductions possibilities caused by increases possibilities
in unemployment and in resource quantities or
productive inefficiency improvements in resource quality
Y
military goods
military goods
military goods
C
B
B A
A
0 PPC2 PPC1
PPC1 PPC2 PPC3
0 0
consumer goods consumer goods consumer goods
Figure 11.4: Using the production possibilities model to illustrate economic growth
TIP
Part (a) illustrates short-term growth, shown by actual growth in the PPC model. Part (b) illustrates
long-term growth, shown by growth in production possibilities in the PPC model. Part (c) shows
negative long-term growth through a decrease in production possibilities.

Chapter 12 Economics of inequality and poverty

100
perfect income
cumulative percentage of income
80 equality
60 increased income
equality after
redistribution
40
20
before
redistribution
0 20 40 60 80 100
cumulative percentage of population
Figure 12.4: Lorenz curves and income redistribution in favour of greater income equality
TIP
This figure shows two Lorenz curves and how they change due to changes in the distribution of income
in favour of greater income equality.
Chapter 13 Demand-side and supply-side policies

a
Equilibrium rate of interest b
Changes in the supply of money cause
changes in the equilibrium rate of interest
Sm Sm3 Sm1 Sm2

rate of interest
rate of interest
i3
i i1
i2
Dm Dm
0 Qe 0 Q3 Q1 Q2
quantity of money quantity of money
Figure 13.1: (HL only) The money market and determination of the rate of interest
TIP
This figure shows how the rate of interest rate is determined by the interactions of the supply and
demand for money.

a
The monetarist/new classical model b
The Keynesian model
LRAS Keynesian AS
price level
price level
SRAS
Pl2
Pl2
Pl1
AD2 Pl1
AD2
AD1 AD1
0 Yrec Yp real GDP 0 Yrec Yp real GDP
Figure 13.2: Effects of expansionary policy: eliminating a recessionary/deflationary gap
TIP
This figure shows how expansionary monetary and fiscal policy work to eliminate a deflationary
or recessionary gap. Part (a) is based on the monetarist/new classical model and part (b) on the
Keynesian model. Note that the diagrams are the same for both monetary and fiscal policies.
LRAS AS
price level
SRAS
price level
Pl1 Pl1
Pl2 Pl2
AD1 AD1
AD2 AD2
0 Yp Yinfl real GDP 0 Yp Yinfl real GDP
potential output potential output
Figure 13.3: Effects of contractionary policy: eliminating an inflationary gap
TIP
This figure shows how contractionary monetary and fiscal policy work to eliminate an inflationary
gap. Part (a) is based on the monetarist/new classical model and part (b) on the Keynesian model.
Note that the diagrams are the same for both monetary and fiscal policies.

a
Partial crowding out b
Complete crowding out
due to G SRAS
SRAS
price level
price level
due to G
due to I AD2
due to I AD2
AD3
AD1 AD1
0 Y1 Y3 Y2 0 Y1 Y2
real GDP real GDP
Figure 13.4: (HL only) Crowding out of private investment
TIP
This figure shows how expansionary fiscal policy based on deficit spending (borrowing by the
government) may crowd out investment.
a
The monetarist/new classical model b The Keynesian model
LRAS1 LRAS2 AS1 AS2
SRAS1 SRAS2
price level
price level
Pl1
AD1 AD2 AD2

AD1
0 Y1 Y2
0 Y1 Y2
real GDP
real GDP
Figure 11.3: Supply-side policies and long-term economic growth: achieving potential (full employment) output in a
growing economy
TIP
These two diagrams, based on the monetarist/new classical model in part (a) and the Keynesian
model in part (b), show how supply-side policies aim to shift the LRAS curve or Keynesian AS
curve to the right. Over the long term, the economy moves from one equilibrium to another. (This
figure from Chapter 11 has been included in the material for Chapter 13 because it illustrates the
objectives of supply-side policies.)

supply
P of
labour surplus =
labour
unemployment
Wm
We
demand
for
labour
0 Qd Qe Qs Q
quantity of labour
Figure 10.1b: Minimum wage legislation
TIP
This figure, which appears under Chapter 10, shows how eliminating or reducing the minimum wage
is expected to result in reduction of structural unemployment caused by minimum wage legislation.
(Reduction of minimum wages is a supply-side policy.)
Unit 4 The Global Economy

Chapter 14 International trade: Part I
a
World market price for b
Bindle exports under c
Bindle imports under free
bindles free trade trade
P P P P P Sd = domestic supply
Sw Sw
Sd = domestic supply
Sd = domestic supply
exports exports Pd
world price = world price = world price =
Pw Pw Pw Pw world supply world supply Pw world supply
Pd Pd curve curve imports curve
Dd =
domestic
Dd = domestic Dd = domestic demand
Dw Dw demand demand
0 0 0
Q QQd 0 Qs Qd Qs Q 0 Qs Qd Q

Figure 14.1: Using diagrams to illustrate free trade
TIP
Part a shows how global demand and global supply of a good determine its equilibrium world
price. Part b shows that if the world price is greater than a country’s domestic price, that country will
export the good because it has a comparative advantage in its production. Part c shows that if the
world price is lower than a country’s domestic price then the country will import the good as it has a
comparative disadvantage in its production.

25
20
15 Microchippia’s PPC
cotton
10
5 Cottonia’s
PPC
0
10 20 30 40 50 60
microchips
Figure 14.4: (HL only) Comparative advantage
TIP
This figure illustrates comparative advantage of the country that has lower opportunity cost in
producing a good. The country with the flatter PPC has a comparative advantage in the good
measured on the horizontal axis (therefore Microchippia in microchips).
a Effects on imports b Effects on welfare

P Sd = P Sd =
domestic domestic supply
supply
government revenue welfare loss = d + f
Pd
Pw + t world price + tariff Pw + t a b world price + tariff
tariff c e f tariff
Pw world price = Pw g d world price =
world supply curve world supply curve
Dd = domestic demand Dd = domestic demand
0 Q1 Q2 Q3 Q4 Q 0 Q1 Q2 Q3 Q4 Q
imports with tariff imports with tariff
imports without tariff imports without tariff
Figure 14.6: Effects of a tariff
TIP
The two figures are used to illustrate the effects of a tariff on price, quantity produced, quantity
consumed, quantity of imports, producer revenues, import expenditures and welfare.

a Effects on imports b Effects on welfare
P Sd = domestic supply P Sd = domestic supply
Sdq = domestic supply Sdq = domestic supply

quota quota plus quota a quota plus quota
revenue
Pq Pq b welfare loss = d + e + f
world price =
c d e e f world price =
Pw world supply curve Pw g world supply curve
Dd = domestic demand Dd = domestic demand

0 Q1 Q2 Q3 Q4 Q 0 Q1 Q2 Q3 Q4 Q
imports with quota imports with quota
imports without quota imports without quota
Figure 14.8: Effects of a quota
TIP
The two figures are used to illustrate the effects of a quota on price, quantity produced, quantity
consumed, quantity of imports, producer revenues, import expenditures and welfare.
P (£) Sd
Ss
Pw+s
a b
Pw
Dd
Q1 Q3 Q2 Q
Figure 14.12a: Effects of a production subsidy
TIP
This figure is used to illustrate the effects of a production subsidy on price, quantity produced,
quantity consumed, quantity of imports, producer revenues, import expenditures and welfare.

P
Sd
Pw+s Pw+s
Pw a b c d Ss
Pw
Dd
Q3 Q1 Q2 Q4 Q
Figure 14.13a: Effects of an export subsidy
TIP
This figure is used to illustrate the effects of an export subsidy on price, quantity produced, quantity
consumed, quantity of exports, producer revenues, export revenues and welfare.
Chapter 16 Exchange rates and the balance of payments

per $ = price of $ in terms of
excess supply of $ S of $
(dollars)
0.80
equilibrium
0.67 exchange rate
0.50
excess demand for $ D for $
(dollars)
0 Q of $ (dollars)
Figure 16.1a: Exchange rate determination in a freely floating exchange rate system: the market for dollars
TIP
This diagram shows that the demand for a currency and the supply of a currency determine the
equilibrium exchange rate in a floating exchange rate system.

a $
appreciation due to b $
appreciation due to
increase in demand for $ decrease in supply of $
€/$ S2
S €/$
S1
e2
e1 e2
e1
D2 D1
D1
0 Q of $ 0 Q of $
c $
depreciation due to d $
depreciation due to
decrease in demand for $ increase in supply of $
S1
€/$ €/$
S S2
e1 e1
e2 e2
D1 D
D2
0 Q of $ 0 Q of $
Figure 16.2: Exchange rate changes in a floating exchange rate system
TIP
These diagrams show how changes in currency demand or currency supply result in a new
equilibrium exchange rate.
a Changes in aggregate demand b Changes in short-run aggregate supply
SRAS SRAS3
SRAS1
SRAS2
price level
price level
Pl2 Pl3
Pl1 Pl1
Pl3 AD2 Pl2
AD3 AD1 AD
0 Y3 Y1 Y2 0 Y3 Y1 Y2
real GDP real GDP
Figure 9.4: Impacts of changes in short-run macroeconomic equilibrium
TIP
Refer to this figure, which appears under Chapter 9, in order to use the AD-AS model to show
consequences of changes in exchange rates. For example, currency depreciation may cause an
increase in AD (through an increase in X-M), resulting in demand-pull inflation. It can also cause a fall
in SRAS due to higher import costs leading to cost-push inflation.

a
Shifting the currency demand curve b Shifting the currency supply curve
S of boples
S1 of boples
$ per bople = price of
2.central bank buys S2
$ per bople = price of

boples in terms of $
boples in terms of $
excess boples, 2.imports are reduced,
increasing demand therefore the supply
B A for boples of boples falls
B A
2.00 2.00
1. fall in demand for 1. fall in demand for
1.50 Bopland's exports Bopland's exports
C reduces demand reduces demand
for boples for bople
D2 for boples D1 for boples D2 for boples D1 for boples
0 Q of boples 0 Q of boples

Figure 16.4: Fixed exchange rates: maintaining the value of the bople at 1 bople=$2.00
TIP
i In both parts, there is a fall in the demand for exports, causing a fall in the demand for boples,
hence a bople depreciation. In part (a) the central bank buys boples increasing the demand
for boples to its original level, hence maintaining the fixed bople exchange rate. (Increases
in interest rates or borrowing from abroad could have achieved the same effect.) In part (b)
the government makes efforts to restrict imports, thus decreasing the supply of boples and
maintaining the fixed bople exchange rate.
ii The same diagram can be used to illustrate managed exchange rates; the central bank or
government take actions to change currency demand or currency supply in order to influence
the value of the exchange rate.
Chapter 17 Further topics on exchange rates and the

balance of payments (HL only)
a Current account surplus causes appreciation b Current account deficit causes depreciation
$/ (price of in terms of $)
/$ (price of $ in terms of )
S of $ S1 of
0.90 C S2 of
B D
0.67 A D2 for $ 1.50 E
F
1.11
D1 for $ D for
0 Q of $ (dollars) 0 Q of (euros)

Figure 17.1: (HL only) Current account and exchange rates
TIP
Part (a) shows that when there is a current account surplus, the extra demand for the currency is
likely to exert an upward pressure on the value of the currency, or appreciation. Part (b) shows that
when there is a current account deficit, the extra supply of the currency is likely to cause a downward
pressure on the value of the currency, or depreciation.

a V
alue of exports is equal to value of imports b
Trade deficit at time of devaluation/depreciation
at time of devaluation/depreciation
trade
trade balance
balance (X – M)
(X – M)
trade
trade surplus
surplus (X > M)
(X > M)
(X = M) 0
(X = M) 0 time
trade
time deficit
trade
deficit (X < M)
(X < M) time of devaluation/depreciation time of devaluation/depreciation
Figure 17.3: (HL only) J-curve effect
TIP
The J-curve effect follows from the Marshall-Lerner condition that is unlikely to be satisfied over
short periods of time, while it is more likely to be satisfied over longer periods of time. The figure
shows how a current account deficit increases following a depreciation/devaluation which over time
begins to improve, turning into a current account surplus.
Chapter 19 Barriers to economic growth and economic

development
low low low
income savings investment
low
low physical human low natural
capital capital capital
low productivity
low growth
of labour
in income
and land
Figure 19.1: The poverty cycle (poverty trap)
TIP
This diagram shows how poverty can be a cause of poverty that is perpetuated from generation
to generation.

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Important diagrams with tips on how to use them

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Unit 1 Introduction to economics

Figure 1.1: Production possibilities curve

a Increasing opportunity costs b Constant opportunity costs

1 Economics for the IB Diploma - Tragakes © Cambridge University Press 2020

PPC2 PPC1 PPC1 PPC2

households (wages, rents, interest, profit) firms

2 Economics for the IB Diploma - Tragakes © Cambridge University Press 2020

Figure 2.4: Movements along and shifts in the demand curve

Figure 2.8: Movements along and shifts of the supply curve

3 Economics for the IB Diploma - Tragakes © Cambridge University Press 2020

Figure 2.11: Market equilibrium

a Increase in demand b Decrease in demand

a Increase in supply b Decrease in supply

4 Economics for the IB Diploma - Tragakes © Cambridge University Press 2020

a Adjustment of price to increased demand

Figure 2.16a: Price as a signal and incentive

Figure 2.17: Consumer and producer surplus in a competitive market

5 Economics for the IB Diploma - Tragakes © Cambridge University Press 2020

Figure 3.1: Demand curves and PED

6 Economics for the IB Diploma - Tragakes © Cambridge University Press 2020

Figure 3.6: PED and total revenue

7 Economics for the IB Diploma - Tragakes © Cambridge University Press 2020

Figure 3.10: The Engel curve showing different YEDs

Frequently encountered cases

Figure 3.13: Supply curves and PES

8 Economics for the IB Diploma - Tragakes © Cambridge University Press 2020

Chapter 4 Government intervention in microeconomics

Figure 4.1: Price ceiling (maximum price) and market outcomes

9 Economics for the IB Diploma - Tragakes © Cambridge University Press 2020

Figure 4.5: Price floor (minimum price) and market outcomes

10 Economics for the IB Diploma - Tragakes © Cambridge University Press 2020

Figure 4.11: Supply curve shifts due to an indirect tax

consumer tax per S1 = MC

Figure 4.12: Effects of indirect taxes on consumer and producer surplus

11 Economics for the IB Diploma - Tragakes © Cambridge University Press 2020

Figure 4.15: Impacts of subsidies on market outcomes

Figure 4.16: Effects of subsidies on consumer and producer surplus

12 Economics for the IB Diploma - Tragakes © Cambridge University Press 2020

Chapter 5 Market failure and socially undesirable outcomes I:

Figure 5.2: Demand, supply and allocative efficiency with no externalities

Figure 5.3: Negative production externality

13 Economics for the IB Diploma - Tragakes © Cambridge University Press 2020

Figure 5.4a: Welfare loss in a negative production externality

MSC = MPC + tax

Figure 5.5a: Imposing an indirect tax on output or on pollutants

Figure 5.5c: Tradable permits

14 Economics for the IB Diploma - Tragakes © Cambridge University Press 2020

Figure 5.9: Negative consumption externality

Figure 5.10a: Welfare loss in a negative consumption externality

15 Economics for the IB Diploma - Tragakes © Cambridge University Press 2020

a Market-based: imposing an indirect tax b Government regulations and advertising

Figure 5.11: Correcting negative consumption externalities

Chapter 6 Market failure and socially undesirable outcomes II:

Figure 6.1: Positive production externality

16 Economics for the IB Diploma - Tragakes © Cambridge University Press 2020

Popt welfare loss

Figure 6.2a: Welfare loss in a positive production externality

a Direct government provision b Granting a subsidy

a Legislation or advertising b

a Abnormal profit b Normal profit

a The economy with a deflationary b

a The shape of the Phillips curve b

a The shape of the LRPC and SRPC b