P ($)
5
P ($)
5
2
1
DA
2 4 6 8 10 12
quantity of chocolate
bars (per week)
demands
of other
consumers
in the
market
3
2
1
DB
2 4 6 8 10 12
quantity of chocolate
bars (per week)
Dm
2 4 6 8 10 12 14
quantity of chocolate bars
(thousands per week)
P
change in demand
P1
change in
quantity
demanded
decrease
in D
P2
D2
D3
D
0
increase
in D
Q1
Q2
D1
Q
(a) Supply of rm A
(b) Supply of rm B
P$
P$
SA
5
4
+ 3
SB
supplies
of other
firms in
the market
= 3
2
1
200
400
600
quantity of chocolate
bars (per week)
Sm
200
400
600
quantity of chocolate
bars (per week)
2 4 6 8 10 12
quantity of chocolate
bars (thousands per week)
S
B
P2
change in
quantity
supplied
P1
Q1
Q2
P1
S1
S3
Q3
decrease
in supply
increase
in supply
Q1
Q2
S2
surplus
4
3
equilibrium
price
market equilibrium
2
shortage
D
equilibrium quantity
2
4
6
8 10 12
quantity of chocolate bars
(thousands per week)
14
initial
equilibrium
P2
a
P1
final
equilibrium
P1
b
D2
final
equilibrium
S
a
P3
D1
0
Q1
initial
equilibrium
D1
D3
Q2
Q3
Q1
Figure 2.10 Changes in demand and the new equilibrium price and quantity
initial
equilibrium
P
a
P1
S2
P2
S3
final
equilibrium
final
equilibrium
P1
S1
P3
D
0
Q2
Q1
initial
equilibrium
D
0
Q3
Q1
Figure 2.11 Changes in supply and the new equilibrium price and quantity
S
C
P2
P1
B
D2
D1
Q1
Q3
shortage =
excess demand
Q2 Q
P1
S = MC
P2
P3 consumer
surplus
Pe
producer
surplus
P4
P5
Allocative
efficiency:
at market
equilibrium
MB = MC and
social surplus
is maximum
D = MB
P6
0
Qa Qb
Qe
Qd = 14 2P
4 Qd = 10 2P
3
P ($)
Qd = 19 2P
4
a
decreases
a
increases
3
2
Qd = 14 2P
Qd = 14 4P
absolute
value of b
increases
2 4 6 8 10 12 14 16 18 20
quantity of chocolate bars (thousands per week)
P ($)
5
Qs = 1 + 2P
Qs = 2 + 2P Qs = 6 + 2P
Figure 2.13 Changing the slope of the demand curve (changes in b in the
function Qd = a bP )
P($)
5
4
4
3
0
2 4 6 8 10 12 14 16 18 20
quantity of chocolate bars (thousands per week)
c
decreases
c
increases
0
2 4 6 8 10 12 14 16 18
quantity of chocolate bars (thousands per week)
Qs = 2 + 2P
value
of d
increases
Qs = 2 + 4P
0
2 4 6 8 10 12 14 16 18
quantity of chocolate bars (thousands per week)
Figure 2.15 Changing the slope of the supply curve (changes in d in the
function Qs = c + dP )
Chapter 3 Elasticities
Frequently encountered cases
P
5%
P2
P2
P1
10%
P1
D
Q2 Q1
5%
P1
P2
5%
P1
10%
Special cases
Q2 Q1
D
Q2
Q1
Q1
5%
Figure 3.1 Demand curves and PED
P ($)
50
45
40
35
30
25
20
15
10
5
0
PED = 4
e
d
elastic portion of
demand curve
PED = 1
c
inelastic portion
of demand curve
b PED = 0.25
a
10 20 30 40 50 60 70 80 90 100
units of good A
PED > 1
P2
P1 C
PED > 1
PED = 1
PED < 1
PED = 1
P2
P1
A B
0
Q2 Q1
PED < 1
C
A
P2
B
Q2 Q1 Q
P1
C
A
Q2
B
Q1
S2
S2
S1
P
P2
S1
P
S3
S3
P2
P1
P1
P3
P3
D
D
Q2 Q1 Q3
Q2
Q1
Q3
Figure 3.6 Price uctuations are larger for primary commodities because of low PED
tax
per
unit
Pt
S2
final
equilibrium
S1
initial
equilibrium
P1
final
equilibrium
Pt
P1
Qt
tax
per
unit
S1
initial
equilibrium
D
0
S2
Qt
S
YED < 0 0 < YED < 1 YED > 1
inferior
good
D2
D3 D1
D increases
as price of
Coca-Cola
increases
D decreases as price
of Coca-Cola decreases
income
inelastic
demand,
normal
good
D2
D1
income
elastic
demand,
normal
good
D3
D4
Q
Q
Figure 3.9 Demand curve shifts in response to increases in income for
different YEDs
D2
D1
D3
D decreases as
price of tennis rackets increases
0
D increases
as price of
tennis rackets
decreases
10%
P2
10%
P1
0
Q1 Q2
P2
P1
0
5%
Q2
15%
Special cases
S1
Q1
S2
S3
0
P1
Q
Q1
S
Q
P
P2
P1
P3
D3
D1
P
S
P2
P1
P3
D2
Q
D2
D3
D1
Q
Figure 3.13 Price uctuations are larger for primary commodities because of low PES
S2 (= S1 + tax)
tax per S
1
unit
government
revenue
Pc
S2 (= S1 + tax)
tax per
unit S1
P*
Pp
Q t Q*
D
Q
tax per
unit
government
revenue
S1
tax per
unit S
Pc
tax per
unit
S2 = S1 + tax
P*
PP
D
Qt Q*
S1
P
Pp
P*
subsidy
per unit
S2 = S1 subsidy
Pc
D
0
Q*
Qsb
S
welfare loss
Pe
Pe
Pc
Pc
shortage =
excess demand
Qs
Qe
Qd
b
d
c
e
excess supply =
surplus
Pf
D = MB
Qs
Qe
Qd
excess supply =
surplus
Pf
Pe
D+
government
purchases
Pe
D
Qd
Qe
Qs
D
0
Qd
Qe
Qs
excess supply =
surplus
S = MC
a
Pf
Pe
S = MC
c
e
f
D+
government
purchases
welfare
loss
D = MB
0
Qd
Qe
Qs
10
supply
of
labour
Wm
Wm
We
We
Qd
Qe Qs
quantity of labour
welfare loss
c
e
demand
for
labour
Q
0
Qd
Qe
Qs
S2 = S1 + tax
S1
Pc
P*
consumers
producers
Pp
Qt Q*
S2 = S1 + tax
tax per
unit
consumers
producers
Qt Q*
S2 = S1 + tax
S1
Pc
consumers
P*
Pp
producers
tax per
unit
consumers
Q*
Figure 4.6 Incidence of an indirect tax with inelastic and elastic demand
S1
producers
D
Qt
Pp
S1
tax per
unit
Pc
P*
S2 = S1 + tax
tax per
unit
Pc
P*
Pp
Qt
Q*
D
Q
Figure 4.7 Incidence of an indirect tax with inelastic and elastic supply
11
S = MC
Pc
consumer
surplus
P*
P*
S2 = S1 + tax
S1 = MC
tax per
unit
consumer
surplus
after the tax
government
revenue from
the tax
welfare loss = a + b
Pp
producer
surplus
producer
surplus
after the
tax
D = MB
D = MB
Q*
Q*
Qt
S = MC
P*
subsidy
per unit
S2 = S1 subsidy
Pp
gain in producer
P * surplus
gain in consumer
surplus
Pc
consumer
surplus
producer
surplus
welfare loss
D = MB
0
Q*
D = MB
Q
0
Q*
Qsb
12
Qopt
allocative efficiency
is achieved
MSC
external
cost
S = MPC
Popt
external
cost S = MPC
Popt
Pm
Pm
MSC
D = MPB = MSB
Q
Qopt Qm
welfare loss
D = MPB = MSB
Qopt Qm
MSC
S = MPC
Popt
Pm
Qopt Qm
D = MPB = MSB
Q
13
P
Pc = Popt
S = MPC
P2
S = MPC
Pm
Pm
Pp
P1
D = MPB = MSB
0
Qopt Qm
S of tradable
permits
D2
D1
D = MPB = MSC
0
Qopt1 Qopt2 Qm
Q1
S = MPC = MSC
Pm
D = MPB
Popt
external
cost
Qopt
Qm
external
cost
D = MPB
MSB
Q
Qopt Qm
external
cost
S = MPC = MSC
MPC + tax
tax =
external
cost
Pc
S = MPC = MSC
Pm
Pm
D1 = MPB
Popt
Qopt
D2 = MSB
after demand decreases
Qm
S = MPC = MSC
Pm
Popt
MSB
welfare loss
Pp
D = MPB
MSB
Qopt
Qm
14
S = MPC
external
benefits
Pm
P
S = MPC
MSC
external
benefits
MSC
Pm
Popt
Popt
Qm Qopt
D = MPB = MSB
Q
D = MPB = MSB
0
S = MPC
Qm Qopt
spillover
benefit
Pm
MSC
Popt
welfare loss
S = MPC
subsidy =
spillover benefit
MSC
Pm
Popt
Qm Qopt
D = MPB
Q
Qm Qopt
D = MPB
Q
15
S = MPC = MSC
Popt
Pm
MSB
welfare loss
S = MPC = MSC
external
benefit
Qm Qopt
D = MPB
Q
Popt
Pm
external
benefits
MSB
D = MPB
Q
Qm Qopt
S = MPC = MSC
Popt
D2 = MSB
Pm
external
benefit
D1 = MPB
0
Qm Qopt
S = MPC = MSC
S + government
provision
Pm
MSB
Pc
D = MPB
0
Qm
Qopt
S = MPC = MSC
subsidy =
external
benefit
MPC
subsidy
Pm
MSB
Pc
D = MPB
0
Qm
Qopt
16
units of output
TP
TC
0
units of output
TVC
costs
TFC
0
output, Q
AP
0
MP
units of variable input (labour)
MC
ATC
costs
AVC
AFC
AP
0
MP
units of variable input (labour)
output, Q
MC
AVC
output, Q
Figure 6.3 Product curves and cost curves are mirror images due to the law of
diminishing returns
17
LRATC
SRATC1
SRATC2
economies
of scale
costs
SRATCm
costs
0
0
Q1 Q2
diseconomies
of scale
LRATC
output, Q
output, Q
a
b
f
d
Q1 Q2 Q3
costs, revenues
costs, revenues
TC
TR
TC
TC
costs, revenues
TR
a
Q1 Q2 Q3 Q
TR
b
Q1
Q2 Q3
Figure 6.10 Prot maximisation using the total revenue and total cost approach when the rm has no control over price
TC,
TR
TC
TC,
TR
TC
b
TR
a
TR
Q
max
Q1min
Figure 6.11 Prot maximisation using the total revenue and total cost approach when the rm has control over price
18
P
S
Pe
Pe
D
Q
0
(a) Individual rm
Figure 7.1
(b) Market/industry
Market (industry) demand and supply determine demand faced by the perfectly competitive rm
P, MR, AR
TR
40
TR
70
60
50
40
30
20
10
0
30
20
10
1 2 3 4 5 6 7 Q
D = P = MR = AR
1 2 3 4 5 6 7 Q
ATC
price,
revenue,
costs
P > ATC
firm makes economic
(supernormal) profit
ATC > P > AVC
firm makes loss but
continues to produce
P < AVC
firm makes loss
and shuts down
MC
1
P1
2
P2
3
P3
P4
P5
0
AVC
4
5
Q5 Q4 Q3 Q2 Q1
output, Q
Figure 7.4 Summary of the perfectly competitive rms short-run decisions, and the rms short-run supply curve
19
MC
P1
ATC AVC
total profit
P1 = MR1 = AR1 = D1
profit
Q1
MC
ATC
P2
P2 = MR2 = AR2 = D2
= break-even price
(break-even point)
Q
Q2
AVC
MC
ATC
P3
total loss
P3 = MR3 = AR3 = D3
loss
Q
Q3
AVC
MC
AVC
P4
ATC
total loss
loss
= AFC
Q
Q4
P4 = MR4 = AR4 = D4
= short-run
shut-down price
Q
ATC
g
P5
P5 = MR5 = AR5 = D5
Q5
AVC
(a) The rm
P
MC
SRATC
D = MR
Pe
LRATC
Pe
D
0
Qf
Qi
Figure 7.5 The rm and industry long-run equilibrium position in perfect competition
20
(a) The rm
costs, revenue, P
P
MC
a
P1
P2
Q2 Q1
S2
P1
P2
S1
ATC
D
Q2
Q1
costs, revenue, P
(c) The rm
P1
P2
ATC
MC
S2
P2
P1
S1
1
D
Q1 Q2
Q2
Q1
costs, revenue, P
MC
S = MC
ATC
Pe
P = MR = Pe
Qe
(a) The rm
Pe
consumer
surplus
producer
surplus
Qe
D = MB
Q
Figure 7.7 Productive and allocative efciency in perfect competition in the long run
21
40
35
30
25
20
15
10
5
TR
Pe
profit
PED = 1
(unit elastic demand)
PED > 1
(price-elastic
demand)
15
PED < 1
(price-inelastic
demand)
10
P = AR = D
Q
1 2 3 4 5 6 7 8 9 10 11
D = AR
Q
MR
max
MC
Pe loss
5
0
ATC
(b)
1 2 3 4 5 6 7 8 9 10 11
price, revenue ( )
MC
a
total revenue ( )
ATC
c
d
MR
Qlmin
D = AR
Q
-5
MR
MC
P
costs
Pr
D = AR
0
Qr
MR
D
0
minimum efficient
scale
LRATC
22
(b) Monopoly
MC
Ppc
P = MRpc
D = MB
0
Qpc
S = MC
b
Pm
Ppc
D = MB
0
Qm
Qpc
MRm
Ppc
(b) Monopoly
consumer
surplus
S = MC
A
consumer
surplus
Pm
producer
surplus
B
Qpc
E
F
producer
surplus
D = MB
0
MC
Qm
D = MB
Qpc
MRm
Figure 7.15 Consumer and producer surplus and welfare (deadweight) loss in monopoly compared with perfect competition
MC
(b) Monopoly
price, costs
ATC
Pe
Qpe
at long-run equilibrium
production takes place at min ATC
(productive efficiency), and
Pe = MC (allocative efficiency)
MC
Pe
ATC
D
0
Qm
Q
MR
at long-run equilibrium
production takes place at greater than
min ATC (productive inefficiency), and
Pe > MC (allocative inefficiency)
Figure 7.16 Allocative and productive inefciency in perfect competition and monopoly
23
economic
(supernormal)
profit
MC
Pe
ATC
D = AR
Qe
MC
ATC
Pe
D = AR
0
(c) Losses
Qe
losses
Pe
D = AR
0
Qe
MR
MR
MR
ATC
MC
ATC
Pe
D = AR
Qe
Qc
MR
40
million
Zs
MC
40
million
Zs
70
million
Zs
10
million
Zs
4
10
million
Zs
70
million
Zs
2
20
million
Zs
20
million
Zs
P
MC
a
Pe
MC1
ATC
MC2
profit
P1
MR
max
D = AR
Q
Q1
Q
MR
24
P1
P2
MR = MR1 + MR2
D2
D1
0
MC
Q1
MR1
(a) Market 1
Q2
(b) Market 2
MR2
Q
Q3
25
in (
ho
n
tio
households
(consumers)
ip
rsh
eu
uc
land
, la
bo
land, lab
rship
our,
reneu
cap
p
e
r
i ta
en t
resource
l, e
,
l
a
t
nt
i
markets c
p
re
a
o
c
e
s
t
m
s
o
o
c
n
f
i
p
ld
ro
s,
d
age fit)
ho
se
t, wt, pro
n
re eres
t
en
pr
ur
,
firms
(businesses)
ou
pe sehol
d
nd
itur
e
go
o
ds
an
ds
erv
product
markets
ices
es
ex
s
nue
reve
ds
goo
ic
rv
se
d
n
a
factor incomes
(wages, rents, interest, profit)
households
(consumers)
firms
(businesses)
consumer expenditure
di
en
sp
ng
o
tax
es
ni
mp
or t
ng
financial markets
t
en
st m
inve
government
ern
gov
nt
spe
di
ng
ndi
ng
on
e xp
orts
savi
me
en
sp
other countries
26
expansion
long term growth trend,
or potential GDP
peak
trough
trough
0
time (years)
Figure 8.4 The business cycle
contraction:
unemployment
increases
real GDP
d
b
a
long term
growth trend, or
potential GDP =
full employment GDP;
unemployment =
natural rate of
unemployment
0
time (years)
Figure 8.5 Illustrating actual output, potential output and unemployment in the business cycle
27
price level
price level
SRAS
AD
0
real GDP
AD1
AD2
0
real GDP
price level
price level
SRAS
Ple
SRAS
Ple
AD
Ye Yp
real GDP
SRAS3 SRAS
1 SRAS
2
price level
price level
AD3
0
real GDP
price level
SRAS
Ple
AD
real GDP
Yp
Ye
real GDP
AD
Yp = Ye
real GDP
28
Pl2
Pl1
Pl3
AD2
AD3
AD1
Y3 Y1 Y2
price level
price level
SRAS
SRAS1
SRAS2
Pl3
Pl1
Pl2
AD
Y3 Y1 Y2
real GDP
real GDP
LRAS
LRAS
Pl1
AD3
Pl2
AD2
AD1
Pl2
SRAS3
Pl1
Pl3
AD
Yrec Yp Yinfl
recessionary
(deflationary) gap
price level
price level
SRAS
Pl3
SRAS2
SRAS1
real GDP
inflationary
gap
Y2 Yp Y3
0
recession with
inflation
('stagflation')
real GDP
higher real
GDP with lower
price level
LRAS
price level
SRAS
AD
0
Yp
real GDP
Figure 9.7 The LRAS curve and long-run equilibrium in the monetarist/
new classical model
29
Pl1
Pl2
SRAS2
Pl3
Yrec Yp
LRAS
SRAS1
price level
price level
LRAS
AD1
AD2
Pl3
Pl2
Pl1
SRAS1
SRAS2
b
a
AD1
AD2
Yp Yinfl
real GDP
real GDP
Figure 9.8 Returning to long-run full employment equilibrium in the monetarist/new classical model
LRAS
Keynesian AS
Pl1
price level
price level
SRAS1
AD1
SRAS2
Pl2
section III
section II
AD2
Yp
section I
real GDP
AD
Ye
real GDP
Keynesian AS
price level
Keynesian AS
price level
price level
Keynesian AS
AD
Yp
real GDP
Yp Ymax
Yp Ye
real GDP
AD
Yp = Ye
real GDP
Figure 9.12 Three equilibrium states of the economy in the Keynesian model
30
Pl1
Pl2
price level
price level
LRAS
AD3
Pl3
AD2
AD1
Yp
AD2
AD1
real GDP
Y1
Y2
AD3
AD4
Y3 Yp real GDP
Figure 9.13 Effects of increases in aggregate demand on real GDP and the price level
AS1
AS2
price level
price level
LRAS1
Yp1
Yp1
Figure 9.14 Increasing potential output, shifts in aggregate supply curves and long-term economic growth
AS1
LRAS2
SRAS1
SRAS2
Pl1
AD1
0
Y1
AD2
Y2
real GDP
AS2
price level
price level
LRAS1
AD2
AD1
Y1
Y2
real GDP
Figure 9.15 Long-term economic growth: achieving potential (full employment) output in a growing economy
31
Keynesian AS
induced
spending
$8
million
Pl3
price level
price level
autonomous
spending
$24
million
$32 million
AD1
Y1
AD2
Y2
AD3
Y3
real GDP
Figure 9.17 Aggregate demand, real GDP and the multiplier in the
Keynesian model
Pl2
Pl1
AD1
Y1
AD2
Y2
real GDP
AD3
AD4
Y3
Figure 9.18 How the effect of the multiplier changes depending on the
price level
32
S2
S1
price
price
S
P1
P2
D1
P2
P1
D
D2
0
Q2
Q1
Q2
Q1
labour surplus =
unemployment
supply
of
labour
Wm
We
Qd
Qe Qs
quantity of labour
demand
for
labour
Q
Keynesian AS
SRAS
Pl1
Pl2
price level
price level
LRAS
AD1
Pl1
Pl2
AD1
AD2
AD2
Yrec Yp
Yrec
real GDP
Yp
real GDP
LRAS
AS
LRAS
Pl1
AD2
AD1
Yp
Yinfl
real GDP
Figure 10.4 Demand-pull ination
Pl2
Pl1
AD2
AD1
Yp Yinfl
real GDP
price level
Pl2
price level
price level
SRAS
SRAS2
SRAS1
Pl2
Pl1
AD1
Yrec
Yp
real GDP
Figure 10.5 Cost-push ination
33
price level
rate of inflation
SRAS3
c
a
PC3
PC2
PC1
unemployment rate
Pl3
SRAS2
Pl2
SRAS1
b
a
Pl1
AD
0
Y3 Y2 Y1
real GDP
Figure 10.7 Stagation: outward shifts of the short-run Phillips curve due to decreasing SRAS
9%
7%
5%
0
LRAS
c
b
a
SRPC2
SRPC1
3% 5%
unemployment rate
5% = natural rate
of unemployment
price level
rate of inflation
LRPC
Pl3
Pl2
Pl1
SRAS2
b SRAS1
AD2
AD1
Yp Yinfl
real GDP
34
B
A
0
80
60
Belarus
f
20
c
e
a
40
perfect
income
equality
b
Bolivia
40
80
20
60
cumulative percentage of population
100
Figure 11.3 Lorenz curves: Belarus achieves greater income equality than
Bolivia
100
PPC1 PPC2 PPC3 X
80
60
increased income
equality after
redistribution
40
20
Figure 11.4
perfect income
equality
before
redistribution
40
80
20
60
cumulative percentage of population
100
35
LRAS
price level
price level
LRAS
SRAS
Pl2
Pl1
AD2
SRAS
Pl1
Pl2
AD1
AD2
AD1
Yrec Yp
real GDP
AS
Pl2
Pl1
price level
price level
Keynesian AS
Pl1
Pl2
AD1
AD2
AD2
AD1
Yrec
price level
(a)
due to G
SRAS
due to I
Y1 Y3
real GDP
potential output
(b)
AD1
Yp real GDP
AD2
price level
due to I
AD3
Y2
SRAS
due to G
AD2
AD1
0
Y1
Y2
real GDP
36
rate of interest
Sm
i
Dm
0
Qe
quantity of money
Sm1
Sm2
i3
i1
i2
0
Dm
Q3
Q1 Q2
quantity of money
Figure 12.4 The money market and determination of the rate of interest
37
good Y
good Y
good Y
0
country A
country B
good X
good X
country A
country B
good X
(2)
Microchips
(3)
(4)
20
or
10
10 units of microchips 1
=
20 units of cotton
2
20 units of cotton
=2
10 units of microchips
25
or
50
50 units of microchips
=2
25 units of cotton
25 units of cotton
1
=
50 units of microchips 2
25
cotton
20
Microchippias PPC
15
15
B consumption
10
5
10
5
cotton
20 A production
Cottonias
PPC
10 20 30 40 50 60
microchips
10 20 30 40 50
microchips
20
15
10
D consumption
5
C production
0
10 20 30 40 50
microchips
Figure 13.4 The gains from specialisation and trade based on comparative
advantage: both countries consume outside their PPC
38
Sd =
domestic
supply
Pd
Pw + t
government revenue
world price + tariff
tariff
Pw
0
world price =
world supply curve
Q1
Q2
Q3
Q4
Dd = domestic demand
Pq
Q1
Q2
Q3
domestic supply
b
e
a
d
tariff
world price =
world supply curve
Q2
Q3
Q4
Sd = domestic supply
P
a
Dd = domestic demand
Q1
Q4
Dd = domestic demand
Sd =
welfare loss = d + f
world price =
world supply curve
plus quota
Pw
Pw g
quota
quota
revenue
Pw + t
Sd = domestic supply
Pq
Pw g
b
c
quota
d e
welfare loss = d + e + f
e f
world price =
world supply curve
Q1
Q2
Q3
Q4
Dd = domestic demand
Sd = domestic supply
Sds = domestic
subsidy
Ps
world price =
world supply curve
Pw
Dd = domestic demand
0
Q1
Q3
Q2
39
excess supply of $
(dollars)
0.80
equilibrium
exchange rate
0.67
0.50
D for $
(dollars)
Q of $ (dollars)
2.00
equilibrium
exchange rate
1.50
1.25
D for
(euros)
Q of (euros)
S of boples
A
1. fall in demand for Bopland's
exports reduces demand
for boples
C
D2 for boples
D2 for $
D1 for $
0
Q of $ (dollars)
S1 of
S2 of
1.50
E
F
1.11
D for
0
Q of (euros)
Figure 14.2 Exchange rate changes in a freely oating exchange rate system
0.67
(euros)
Q of boples
D1 for boples
S of
excess supply of
2.00
1.50
0.90
S of $
S1 of boples
S2
2.00
D2 for boples
0
D1 for boples
Q of boples
Figure 14.3 Fixed exchange rates: maintaining the value of the bople at 1 bople = $2.00
40
good A
PPC
good B
good A
D
PPC
good B
Figure 14.6 Using a PPC to illustrate a trade decit and a trade surplus
41
S
global supply
of wheat
P2
P1
D2
global demand
D1 for wheat
P3
D3
0
Q3
Q1
Q2
quantity of internationally
traded good
S3
S1
global supply
P3
S2
P1
P2
global demand
D
Q3 Q1
Q2
quantity of internationally
traded good
Figure 15.1 Changes in global demand or supply: terms of trade impacts on the balance of trade
S1
S2
P1
P2
D2
D1
0
42
industrial goods
C
D
E
B
PPC1
PPC2
merit goods
low
income
low
savings
low
investment
low physical
capital
low growth
in income
low
human
capital
low natural
capital
low productivity
of labour
and land
43