Slides For Economics

Unit cost of production
(Total Cost/ Output)

Short-run average cost curve 1
SACC 2
SACC 4
Short-run average cost
curve 3
Long-run average cost curve (red

envelope curve of SACC curves)
Economies of scale
Diseconomies of scale
Minimum efficient scale
Scale of production
Tendency for natural monopoly if the minimum efficient scale (MES) of production is
only achieved with a large share of the total market, and operators incur a significant
cost disadvantage by operating below the minimum efficient scale of production.
Unit cost of production

(Total Cost/ Output)
Long-run average
cost curve
Short-run average
cost curve 3
Short-run average
cost curve 1
SACC 4
SACC 4
Diseconomies of scale
Minimum efficient scale
Scale of production
Innovation Waves
Water power,
textiles and iron
(1780 1830).
1780
1850
Steel,
steam
power and
railways
(1830
1880).
Electricity,
chemicals
and the
internal
combustion
engine
(1880-1930)
1900
Electronics
and aviation
(1930
1980)
1950
Internet and
fibre optics
(1980
onwards)
1990
Time
Economic
activity
Recovery
Prosperity
Recession
Depression
Time
50 Years
Economic
Growth (GDP)
Recovery
Zero
growth
Prosperity
Downturn
Recession
Negative
economic growth
Recession
Business Cycle (often around 7 years)
Time
Wheat Market
Market Price
()
Demand
Farm A
Supply
Farm B
Marginal Cost
Marginal Cost
Average
Cost
Average
Cost
Quantity
Quantity
Quantity
P is the equilibrium price, within the wheat market = Average Revenue = Marginal Revenue.
Both firms A and B encounter the same revenue conditions.
Profit
Minimum profit constraint

Profit
Profit maximisers output
Sales maximisers output
Sales
Supply Growth
Relationship
Profit ()
Demand Growth
Relationship
Profit ()
Profit ()
Distributed
earnings
Retained
earnings
Growth (%)
Project
profitability
initially
rises
Project
profitability
then falls
Growth (%)
Growth (%)
Optimum
Growth Rate
Demand curve
Price of beer ()
4
3
2
1
0
Quantity (pints of beer)
10
0
20
30
40
50
60
70
Consumers budget is 100 per week

Price of bread is 1 per loaf
Price of beer is 2 per pint
Quantity (Pints) of Beer
50
Budget Line (budget constraint) presents

all product bundle combinations that a
consumer can purchase with their budget:
100 loaves of bread (budget of 100/1)
50 pints of beer (budget of 100 / 2)
0
Quantity of Bread
0
100
Doubling the consumers budget from

100 per week to 200 per week will
double the quantity of loaves and beer that
can be purchased with the available
budget.
This assumes that the price of the
products remains unchanged:
50
100
Budget Line 2
Budget Line 1
0
Quantity of Bread
0
100
200
Halving the consumers budget from 200

per week to 100 per week will halve the
quantity of loaves and beer that can be
purchased with the available budget.
100
50
This assumes that the price of the

products remains unchanged:
Budget Line 1
Budget Line 2
0
Quantity of Bread
0
100
200
50
100
Consequence of doubling the consumers

budget from 100 per week to 200 per
week.
Indifference Curve 2
Budget Line 2
Indifference Curve 1
Budget Line 1
0
Quantity of Bread
0
100
200
50
100
Budget Line 1
Budget Line 2
0
Quantity of Bread
0
100
200
65
50
30
Quantity (Pints) of beer consumed
100
Doubling the price of beer from 2 per pint to 4

per pint for a consumer earning 200 per week,
will reduce beer consumption from 65 pints to 30
pints per week, and increase consumption of
bread from 70 to 80 loaves per week.
((65 x 2) = 130) + ((70 x 1) = 70) = 200
((30 x 4)= 120) + ((80 x 1) = 80) = 200
Budget Line 1
Budget Line 2
0
Quantity of bread consumed
0
70 80
100
200
Substitution effect
100
65
58
50
30
Indifference curve 1
Budget Line 1
Initial Optimum
New optimum
Budget line 2 parallel shift
Budget Line (2)
0
0
55
70 80
100
200
Substitution effect
Income Effect
100
65
58
50
30
Budget Line 1
Initial Optimum
New optimum
Budget Line (2)
0
0
55
70 80
100
200
Substitution effect
Income Effect
100
65
58
50
30
Budget Line 1
Initial Optimum
Substitution effect
B
Income Effect
C
New optimum
Budget Line (2)
0
0
55
70 80
100
200
50
100
Optimum
Budget Line
0
Quantity of Bread
0
100
200
50
Indifference
Curve 1
0
Quantity of Bread
0
100
Marginal Rate of Substitution is different

at each point on the Indifference Curve.
50
Marginal Rate of Substitution

X
Y
X
Marginal Rate of Substitution
Indifference
Curve 1
0
Quantity of Bread
0
100
50
Indifference
Curve 2
Indifference
Curve 1
0
Quantity of Bread
0
100
Indifference
Curve 2
50
Point C is preferable to point A. This is indicated by the

consumer acquiring more of both beer and bread at
point C, relative to point A. However, the indifference
curves suggest the consumer is indifferent between
product bundles A and B, and also product bundles B
and C.
It cannot be the case that an indifference curve is at
some points preferable to another indifference curve,
and at other points equally desirable (or inferior) to the
other indifference curve.
This situation contravenes the axiom of transitivity.
B
Indifference
Curve 1
0
Quantity of Bread
0
100
Long-run Average Cost
Long-run Marginal Cost
AC1
AC
P
Price / Unit Cost (pence)
P1
Monopoly makes
super-normal profit
despite inefficient
production
Average Revenue
MC = MR
Lowest point of AC curve
Firm is loss-making when producing a level of output that is

allocatively and productively efficient
Marginal Revenue
Quantity
Super-normal profit making monopoly output

Q1
Whole Market Output

Q
AC
P
Average Revenue

Marginal Revenue
Quantity
Whole Market Output
Q
AC
Monopoly makes
super-normal profit
despite inefficient
production
Average Revenue
MC = MR

Marginal Revenue
Quantity
Super-normal profit making monopoly output

Q1
Whole Market Output

Q
Price = MC
AC1
Price
()
Whole Market
Demand
Price ()
Individual Firm - Equilibrium
Supply
Marginal
Cost
Equilibrium
Price
Equilibrium Quantity
Quantity demanded and supplied
Average
Cost
MR=AR
Output
Quantity
Loss making firm
Super-normal Profit Earning Firm

Price ()
Price ()
Marginal
Cost
Average
cost
Marginal
Cost
MR = AR
Loss
MR = AR
MC=MR
Output
Average
Cost
MC=MR
Super-normal
profit
Output
Exchange Rate
($ / )
Demand for s
Exchange Rate
($ / )
Supply of s
MC
Price
Each additional
unit produced
generates
greater
additional cost
than additional
revenue.
Each additional unit

produced generates
greater additional
revenue than
additional cost.
MR
Quantity
Profit maximising output
MC
Price
MR
Each additional unit
produced generates
greater additional
revenue than
additional cost.
Each additional
unit produced
generates
greater
additional cost
than additional
revenue.
Quantity
Profit maximising output
Cost/
Price ()
Super normal profit
Marginal Cost
Average
cost
Price
Super-normal
Profit
MC=MR
Cost
Average
Revenue
Output
Marginal
Revenue
Long - Term
Normal profits are earned at the profit
maximising output (MC=MR)
Marginal Cost
Average cost
Price
MC=MR
Marginal
Revenue
Output
Average
Revenue
Exchange Rate
($ / )
Demand for s
Supply of s
More
Dollars
Stronger
Equilibrium
Exchange
Rate ($ / )
At the equilibrium
exchange rate, currency
supply equals demand.
Fewer
Dollars
Weaker
Demand and Supply of s
Price ()
Marginal Cost
Monopoly
Price
Price in
perfect
competition
Welfare loss to society.

Consequence of allocative
inefficiency, due to monopoly output
being lower than perfect competition
output. Where lost units generate a
greater value of satisfaction to
consumers than it costs the
monopolist to produce. Ceteris
paribus.
Price = MC (perfect competition)
MC=MR (monopoly)
Marginal
Revenue
Monopoly Perfect
competition
output
output
Average
Revenue
Price ()
Transfer. Monopoly producer

acquires some of the consumer surplus
Marginal Cost
Monopoly Price
Price in perfect
competition
Price = MC (perfect competition)

MC=MR (monopoly)
Marginal
Revenue
Monopoly Perfect
competition
output
output
Average
Revenue
Price ()
Marginal Cost
(perfect competition)
Marginal Cost
(monopoly)
Monopoly
Price
Price in
perfect
competition
Lower costs of monopolist

may enable the monopolist to
produce the same output as a
perfectly competitive industry,
and charge the same price.
Marginal
Revenue
Average
Revenue
Output is the same in both

monopoly and perfect competition.
Normal Market Demand Curve
Oligopoly Firm Demand Curve

Kinked Demand Curve
Firm expects that price increase would not

be replicated by other companies, causing
company raising prices to suffer a
considerable reduction in sales.
Current Market
Price
Firm expects price reduction may lead to price

war, preventing firm increasing sales and also
reducing industry profitability.
Price
Marginal Cost 2
Marginal Cost 1
Price
Marginal
revenue
Output
Marginal cost can vary between MC1

and MC2 without affecting price
within the oligopoly market, due to
oligopoly being uncertain how their
competitors would respond to a
price change.
Average
revenue
Super-normal profit
Price
Marginal Cost
Average Cost
Price
Profit
MC cuts the lowest point of
the AC curve
Costs
Marginal
revenue
Output
Average
revenue
Price
Firms Demand Curve
Price = MR = AR
MR = Marginal Revenue
AR = Average Revenue
Quantity
Price
Demand
Quantity
Price
Demand
Price
Demand
Price
Demand
Price
Quantity Supplied
Price
Quantity Supplied
Price
Quantity Supplied
Price
S
S1
Quantity Supplied
Price
S1
S
Quantity Supplied
Price
D1
D
Q1
Quantity Demanded
Marginal Social Cost (MSC)

Price
Marginal Social Benefit (MSB)

Marginal Private Benefit (MPB)
Marginal Private
Cost (MPC)
SQ2
PQ 1
Quantity Demanded and Supplied
Marginal Social Cost (MSC)
Price

Dead weight
social
welfare loss
SQ2
Marginal Private
Cost (MPC)
PQ 1
Price

Dead weight social

welfare loss
SQ2
Marginal Social
Cost (MSC)
Marginal Private
Cost (MPC)
PQ 1
Marginal Private Cost (MPC)

Price
Marginal Social
Cost (MSC)
PQ 1
SQ2

Price
Marginal Social
Cost (MSC)
Potential social
welfare gain
PQ 1 SQ2

Price

Marginal Social
Cost (MSC)
Potential social
welfare gain
PQ 1 SQ2
Price
D
D1
Q1
Quantity Demanded
Price
Inelastic
Demand
Price
Elastic
Demand
Business A
Price
Business B
Price
Supply Curve A
Quantity Supplied
Market = All businesses.

Business A + B
Price
Supply Curve B
Quantity Supplied
Supply Curve A+B
Quantity Supplied
Income ()
Inferior good Rising incomes
reduce the quantity demanded.
Income elasticity is zero

demand is unaffected by
income changes.
Income elasticity is initially

positive demand rises with
income Normal good.
Demand
Wage rate ()
SL
DL
Excess
supply
(surplus)
W1. Market wage

rate (above market
clearing wage rate)
W0. Market
clearing wage
rate
QD
QS
Demand and
Supply of Labour
Price
Equilibrium price
Consumer
Surplus
Producer
Surplus
Equilibrium
quantity
Quantity demanded
and supplied
Price
Equilibrium price
Consumer
Surplus
Equilibrium
quantity
Quantity demanded
and supplied
Price
Equilibrium price
Consumer
Surplus
Total
Consumer
Payments
(Price x
quantity)
Equilibrium
quantity
Quantity demanded
and supplied
Price
Equilibrium price
Producer
Surplus
Transfer
Earnings
Equilibrium
quantity
Quantity demanded
and supplied
Price
Equilibrium price
Economic
Rent /
Producer
Surplus
Equilibrium
quantity
Quantity demanded
and supplied
Price
Equilibrium price
Transfer
Earnings
Equilibrium
quantity
Quantity demanded
and supplied
Price ()
S = MC
D = MU
Consumer
Equilibrium Price Surplus (A)
Producer
Surplus
(B)
Transfer
Earnings
(C)
Equilibrium
quantity
Quantity demanded and

supplied
Price ()
D
Slong-run
P5
P3
P1
Pe
P2
P4
Quantity Demanded
and Supplied
QS5 QS3QS1
QE
QS2
QS4
Qs = Short run supply curves
Price ()
Slong-run
D
P1
Pe
P3
P2
QS1
QEQS3
QS2
Qs = Short run supply curves
Quantity Demanded
and Supplied
Total Cost and

Total Revenue
Total Cost
Zone of profit
Total
Revenue
Output
Maximum
profit
Supply - Growth
Profit ()
Demand - Growth
Profit ()
Profit ()
Project
profitability
Project
initially
profitability
rises
then falls
Growth (%)
Optimum
growth rate
Growth (%)
Growth (%)
Flow of Goods and services.

Consumer expenditure on goods and services
Firms
Households
Flow of factor payments (wages, dividends, interest

and rent).
Flow of factors of production (land, labour,
capital and enterprise)
Money
= Income
= Output
Expenditure
Real economy
Real economy
Firms
Flow of
Goods and
services
Flow of factors of
production (land,
labour, capital and
enterprise)
Households
Flow of Goods and services.
Exports
Firms
Households
Flow of factor payments
Government
spending
Withdrawals
from Circular
Flow
Flow of factors of production
Investment
Consumer expenditure on goods and services
Injections into
Circular Flow
Saving
Taxation
Imports
Financial Markets
Foreign Exchange Market
Taxation
Imports (s to foreign
exchange market)
Saving
Investment
Balanced Budget
Exports (s from foreign

exchange market)
Government
Classical view - Exchange rate (price of sterling)

equates supply and demand for Sterling
Classical view - Interest rate (price of borrowing, and income from deferred
consumption) in financial market equates saving and investment
Consumer
Expenditure
()
C = a + bY
}a
Consumption
Income derived
consumer expenditure
Y = National Income
Autonomous consumer expenditure
National Income
Expenditure ()
45 degree line.
Expenditure = Output produced by the economy
Aggregate
Expenditure
Expenditure = Income (45 degree line)

National Income / Output
Keynesian 45 degree Diagram

Aggregate Expenditure
Aggregate Demand Curve
Expenditure ()
Price Level
Expenditure = Income (45
degree line)
Aggregate
Expenditure
(upward sloping)
Aggregate Demand
(downward sloping)
Expenditure ()
45 degree line
Aggregate Expenditure
Expenditure ()
Withdrawals = S + M + T
Injections = I + X + G
National
Expenditure ()
C+I+G+(X-M)
C+I+
Government
Spending
C+ Investment
Consumption

AE 2
National
Expenditure ()
AE2 - Inflationary gap
AE 0 (Equilibrium)
Deflationary gap
AE 1
Output (recessionary)
Gap

Y deflation
Y equilibrium Y inflation
National
Expenditure ()
AD 1
(Equilibrium)
Deflationary gap
AD 0
Output (recessionary)
Gap

Y deflation
Y equilibrium
Aggregate Supply Curve

Price Level
Aggregate
Demand 2
Initial Aggregate Demand
National Income
Y1 Unemployed
Resources
Y2 - Full employment
level of national income

Aggregate Demand 3
Price Level
Aggregate
Demand 2
P3
P2

Percentage change in
money wages
W%
X%
Full employment
2.5%
Rate of unemployment (%)
Price Level
P1
P0
Rising price level

below full
employment is
caused by
bottlenecks
developing within
economy.
Y0
National Income
Price Level
P1
P0
Y0
National Income
Price Level
P2
P1
Aggregate Supply Curve 2
Y2 Y1 Full employment
Price Level
P4
P3
P2
P1
1

Y2 Y1 Full employment
Percentage
change in
money wages
Inflationary expectations = 5%
Natural Rate of Unemployment (NARU)

Inflationary
expectations = 0
5%
Or/
Non-Accelerating Inflation Rate of
Unemployment (NAIRU)
1
2.5%
4
Rate of
Interest
Precautionary
demand (P)
Transactions
demand (T)
Liquidity Preference
Schedule (P + T + S)
Speculative
demand (S)
Quantity of Money
Rate of Interest
Money Supply
Interest
rate
Demand for Money Liquidity Preference

Schedule (T +P + S)
Quantity of Money
Rate of Interest
Monetarist perspective
Money Money
Supply Supply 2
Interest
rate
Interest
rate 2
Quantity of Money
Rate of Interest
Interest
rate 0
Marginal efficiency of
investment (MEI) curve
Interest
rate 2
Investment expenditure 0
Investment expenditure 2
Desired investment expenditure
Rate of Interest
Money Money
Supply Supply 2
Keynesian perspective
Interest
rate
Interest
rate 2
Quantity of Money
Rate of Interest
Marginal efficiency of
investment (MEI) curve
Interest
rate
Interest
rate 2
Desired investment expenditure
Wage
400
Average money holding

during the month is 200.
Week 1
Week 2
Week 3
Week 4
Time
Wage
100
Average money
holding during
the month is 50.
50
Week 1
Week 2
Week 3
Week 4
Time
Interest rate
One year
Two year
Three
year
Four
year
Bond Years
to maturity
Government
Budget Position
Taxation
Budget Surplus
Budget Deficit
Government
expenditure
GDP
Y2
Y1
Y3
Government
Budget Position
Taxation
Budget Surplus
Budget Deficit
Government expenditure 1
Government expenditure
GDP
Y2
Y1
Y3
Net Exports (Exports Imports)

Nation ultimately acquires the
benefits of a currency depreciation
Trade
Surplus
Policy initiative to
depreciate currency.
Trade Surplus
Trade
T1 Deficit
T2
Time
T3
Trade
Deficit
Trade deficit initially becomes

worse, before getting better
Personal
Income Tax
Regressive
taxation
Progressive
taxation
Personal Income
Cumulative Income Share (%)
100%
80%
60%
40%
20%
20%
40% 60%
80%
Cumulative Population Share (%)
100%
Individual Firm Equilibrium
Whole Market
Perfectly competitive firm is a wage taker

Wage ()
Price ()
Demand
for labour
Supply of
labour
Demand for labour = Marginal

revenue product of labour
Wage rate
Equilibrium
Wage
Quantity
Quantity
Individual Firm Equilibrium
Whole Market
Perfectly competitive firm is a wage taker

Price ()
Price ()
Demand
for labour
Supply of
labour
Supply of
labour 2
Demand for labour = Marginal

revenue product of labour
Wage rate 1
W0
Wage rate 2
W1
Q1
Q2
Quantity
Government tax revenue ()
Marginal Tax Rate (%)
Percentage
change in
money wages
Inflationary
expectations = 5%
Inflationary
expectations = 0
Natural Rate of Unemployment

(NARU)
Non-Accelerating Inflation Rate of
Unemployment (NAIRU)
5%
2.5%
Support Activities
Firm infrastructure
Human Resource Management
Technology Development
Service
Marketing and
Sales
Outbound Logistics
Operations
Inbound Logistics
Procurement
Primary activities (end-to-end process)
Philanthropy
Area for Potential

Corporate Shared Value
Social benefit
Improve the external social context in

ways that are beneficial for both the company
and society.
Redesign value chain activities to reduce negative
externalities, and promote positive externalities.
Redesign product propositions and redevelop markets
to reduce social need and increase social benefit.
Economic benefit
Pure commercial
benefit
Backward (Upstream) Vertical Integration

Component
Supplier
Financier /
credit provider
Logistics
Machine
manufacturer
Backward
Vertical
Raw Material
Supplier
Manufacturer
Competitor
Forward
Vertical
By-product
Horizontal
Integration
Retail outlets/
wholesalers
Repairs and
servicing
Customer
support
Customer
finance
Forward (Downstream) Vertical Integration
Logistics
Economists Production Chain is

the same as Porters Value System
Farm (source of raw materials).

Economists refer to this type of activity
occurring within the primary sector.
Factory (manufacturing and

processing). Economists refer to this
type of activity occurring within the
secondary sector.
Shop (services and retailing).

Economists refer to this type of activity
being within the tertiary sector
Value System
Supplier A
Supplier B
Supplier C
Organisations Value Chain
A Distribution
Channel Value Chain
B Distribution
Channel Value Chain
C Distribution
Channel Value Chain
A Customer Value
Chain
B Customer Value
Chain
A Customer Value
Chain
Price
UK Supply
European Supply
Welfare gain from Britain

entering European Union
Trade Creation effect.
P UK
P Euro
UK Welfare gain from

free world trade, rather
than just free European
trade Trade Diversion.
P world
World Supply
UK Demand
Quantity
Q
UK
UK Q
Euro
UK Q
World
Rearranging the optimum equation (shown above) will give:

=
MRS =
Optimum occurs where:
Optimum occurs where the Marginal Rate of Substitution (MRS) equals the ratio of prices =

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Unit cost of production

(Total Cost/ Output)

Long-run average cost curve (red

Minimum efficient scale

Unit cost of production

Business Cycle (often around 7 years)

Minimum profit constraint

Sales maximisers output

Quantity (pints of beer)

Consumers budget is 100 per week

Quantity (Pints) of Beer

Budget Line (budget constraint) presents

Doubling the consumers budget from

Quantity (Pints) of Beer

Halving the consumers budget from 200

This assumes that the price of the

Quantity (Pints) of Beer

Consequence of doubling the consumers

Quantity (Pints) of Beer

Quantity (Pints) of beer consumed

Doubling the price of beer from 2 per pint to 4

Quantity (Pints) of beer consumed

Budget line 2 parallel shift

Budget Line (2)

Quantity (Pints) of beer consumed

Budget line 2 parallel shift

Budget Line (2)

Quantity (Pints) of beer consumed

Budget line 2 parallel shift

Budget Line (2)

Quantity (Pints) of Beer

Quantity (Pints) of Beer

Marginal Rate of Substitution is different

Marginal Rate of Substitution

Marginal Rate of Substitution

Quantity (Pints) of Beer

Point C is preferable to point A. This is indicated by the

Long-run Average Cost

Long-run Marginal Cost

Price / Unit Cost (pence)

Lowest point of AC curve

Firm is loss-making when producing a level of output that is

Super-normal profit making monopoly output

Whole Market Output

Long-run Average Cost

Long-run Marginal Cost

Price / Unit Cost (pence)

Lowest point of AC curve

Firm is loss-making when producing a level of output that is

Long-run Average Cost

Lowest point of AC curve

Firm is loss-making when producing a level of output that is

Super-normal profit making monopoly output

Whole Market Output

Price / Unit Cost (pence)

Long-run Marginal Cost

Individual Firm - Equilibrium

Loss making firm

Super-normal Profit Earning Firm

Each additional unit

Profit maximising output

Profit maximising output

Welfare loss to society.