Hey everyone!
So trials are over, and hopefully you're getting to those last few dot points in the syllabus.
The next step? Practice papers, and lots of it.
One of the biggest troubles I had with Economics was figuring out which diagrams to use (and which diagrams are out there!). SO... may I present to you: 25 diagrams you can use in your economics essay.
If any of the diagrams don't look familiar, check out their explanations below! Otherwise, enjoy the fruits of my two hour procrastination
Topic 1: The Global Economy
1. Business CyclePlots real GDP for a country over time. Shows the stages of the business cycle: upturns, peaks, downturns, and recessions. From this, you can see that real GDP grows over time.
2. TariffAustralia is a price taker in the global market, meaning that domestic producers must sell at world price OP. At this price, domestic producers are only willing to supply OQ goods. But consumers demand OQ1 quantity of goods, so the government has to import QQ1 quantity of goods. Domestic producer revenue is OPXQ and foreign producer revenue is QXYQ1
So the government puts a tariff of PP1 on the good, so the price rises from OP to OP1. At this higher price, domestic producers are now willing to supply a greater quantity (from OQ to OQ2). Quantity demanded falls from OQ1 to OQ3, so we only have to import Q2Q3 quantity of goods. Domestic producer revenue is OP1AQ2 (blue), and foreign producer revenue is Q2DCQ3 (purple), and government revenue from the tariff is ABCD (red).
For this reason, we can graphically see why an effective tariff generates no government revenue-- if the tariff was enough to bring the price to equilibrium level, then there would be no imports and hence no government revenue.
3. SubsidiesCase 1: the subsidy covers all demandDiagram shows price and quantity in the Australian market, equilibrium is where S and D curves meet. At the world price OP1, suppliers are only willing to supply OQ1 quantity of goods, while consumers demand OQ2 quantity of goods. We’d be importing Q1Q2 quantity of goods to make up for it.
Then the government offers a subsidy, which shifts the supply curve to the right from S to S1. Domestic producers, with the extra money, can now produce at an OP2 price level whilst still selling it to consumers for OP1 price. Now, domestic producers can fulfill all domestic demand, so there’s no need for imports
Case 2: the subsidy doesn’t cover all demandSame explanation as above. Only this time, when you increase supply from S to S1, quantity supplied only rises from OQ1 to OQ. But at price OP1, consumers still demand OQ2 quantity of goods, so the remaining QQ2 must be imported.
4. Import QuotaThis version shows domestic demand and supply in Australia. At world price OP, firms supply OQ, and consumers demand OQ1. The remaining QQ1 is imported.
Then the government places a quota of Q2Q3 on that good. This decreases the supply in the market, which drives up the price from OP to OP1. At this higher price, consumers now demand less (OQ1 to OQ3) and firms supply more (OQ to OQ2).
5. Quotas (imported goods only)This shows domestic demand with the supply curves of foreign producers (the curves are vertical because the government controls how much they supply). Shifting the supply curve to the right is an increase in the quota size, while shifting to the left is a decrease in the quota size.
6. Impact of US/EU Wheat Subsidies on AustraliaThis one is a joint diagram. The left represents the global wheat market, and the right represents the Australian wheat market. The world price is OP.
So the US and EU both have subsidies for their agricultural industry, called the Export Enhancement Program and Common Agricultural Policy (respectively). As we’ve seen in the subsidy diagram, this has the impact of increasing supply from S to S1 in the global market, which leads to a fall in world price from OP to OP1
Because Australian producers are price takers, this means our prices also falls from OP to OP1. At this lower price, domestic producers are willing to supply less, which means we’re not earning as much revenue as before.
Topic 2: Australia’s Place in the Global Economy
7. Appreciation (increase in demand, decrease in supply)
8. Depreciation (decrease in demand, increase in supply)These are just your basic demand and supply curves.
9. J-CurveThis graphs net trade (X v M) over time, and shows the effects of a SUSTAINED depreciation.
In the short run, producers are locked into trade contracts, so imports are more expensive and exports are sold for less, leading to a fall in net trade.
But in the long run, because our exporters are more internationally competitive (our prices are cheaper, ceteris paribus), we start exporting more and importing less, resulting in a smaller trade deficit, or even a trade surplus.
10. Fixed Exchange RatePretty much your price ceiling and price floor explanations. Equilibrium exchange rate under a floating system is at OP and OQ.
If the central bank fixes the exchange rate at OP1, which is higher than equilibrium, there is an excess of domestic currency and so the government must continue to buy AUD to make up for it.
If the central bank fixes the exchange rate at OP2, which is lower than equilibrium, there is a shortage of domestic currency and so the government must continue to sell AUD to make up for it.
Topic 3: Economic Issues
11. AD/AS (Keynesian Approach)A nice introduction to AD/AS which builds on the multiplier diagram.
This graphs Income and Expenditure. The consumption/AD function has a constant and a slope, which represents the MPC. The AS curve is a 45 degree line, because at equilibrium expenditure equals income, so this reflects all the possible combinations.
If the government increased investment by 50, the AD curve rises from C to C+I, and hence aggregate demand has increased.
12. Multiplier (Keynesian Approach)Exactly the same as the AD/AS diagram, only with an extra AD curve drawn in. If the government increases AD by 25 (shifting the AD curve up from C + I to C + I2), this causes the equilibrium national income to rise ( 200 to 250). If the government decreases AD by 25 (shifting the AD curve down from C + I to C + I2), equilibrium national income falls (200 to 150). In both these cases, the overall impact on national income was greater than the initial increase that caused it-- this is the multiplier effect.
13. Keynesian Deflationary/Unemployment GapThis also graphs national income and expenditure, with Ye being the equilibrium level of national income and Yf being the level of income necessary for full employment. Because Ye is less than Yf, there is a deflationary gap of size ab, which represents the level of cyclical unemployment. To close the deflationary gap, the government can increase AD from AD to AD1, which would put the Ye and Yf points in the same place.
14. Keynesian Inflationary GapA similar deal, except this time Yf is below Ye, meaning that the equilibrium level of income exceeds the level needed for full employment. Due to this, you have inflation of size cd. To close the inflationary gap, the government can decrease AD from AD to AD1.
15. Short Run Phillips Curve (SRPC)This graphs the percent change in inflation and unemployment, and shows that in the short run, there is a tradeoff between inflation and unemployment. If the government tried to decrease the level of unemployment from 6% to 5%, this would cause inflation to rise from 3% to 5%.
16. Long Run Phillips Curve (LRPC)In the long run, there is no tradeoff between inflation and unemployment. The LRPC is fixed at the NAIRU (6%). If the government tried to decrease unemployment beyond the NAIRU using expansionary macroeconomic policy, in the short term unemployment would fall from 6 to 5%, trading off inflation rising from 0 to 2%. But in the long run, unemployment would rise again back to the LRPC/NAIRU, at a higher level of inflation than it was originally. This zig-zag pattern results.
17. Lorenz CurveGraphs the cumulative percentage of households and the cumulative percentage of income they cover. The 45 degree line represents the line of equality, where 20% of households own 20% of the income, 40% of households own 40% of the income, and so on. The further away from the line of equality the lorenz curve is, the more unequal the distribution of income.
The Gini Coefficient is the area between the curve and the line of equality (A) over the whole triangle area (A + B). Hence, the closer to 0 you are, the more equal.
18. Exploitation of Natural ResourcesBet you thought you’d never have to see the PPF again, eh? This shows all the production possibilities of primary goods and manufactured goods using available resources. If the government and businesses used their natural resources faster than it can regenerate in the short run, this would decrease the natural resources available in the future, causing a parallel shift inwards of the PPF curve.
19. Negative ExternalitiesYou have two supply curves-- S(private) represents the market supply curve, not taking into account the social effects. S(social) takes into account the social costs like the environment, which is why it’s to the left of S(private). You want to produce less to be better to the environment, and that higher Ps also reflects that. The size of the externality is the vertical distance between the two curves at that given quantity.
20. Positive ExternalitiesSimilar deal, except you have two demand curves, representing the benefit gained by the consumer (D(private) and greater society (D(social)). With positive externalities, society also gains benefit from an individual consuming a good, which is why the price is valued higher.
21. Tradable Emissions PermitsThese are permits that the government sells to companies, representing how much pollution they’re allowed to emit every year. The supply curve is vertical because the government only supplies a certain amount of permits.
If the price is too low (Py), demand for these permits is higher than supply, and so the government is missing out on the extra revenue. If the price is too high (Px), then the pollution permits target has not been met.
22. Optimum Level of Pollution AbatementAbatement costs are any costs associated with the reduction of pollution (whether it be R&D, costs of waste management, or disposal).
This diagram shows the tradeoff between external costs (that society bears) and abatement costs (that the firm bears). At 0% pollution abatement requirement, the external costs are highest and abatement costs lowest (because the firm doesn’t have to worry about pollution management and so the environment suffers). On the other hand, at 100% abatement requirement the firm has high abatement costs but the external costs are low.
The government wants to strike a balance between the two, because if the requirement isn’t high enough, then natural resources are being depleted. If the requirement is too high, some firms may just choose to exit the market.
Topic 4: Economic Policies
23. Budget OutcomesThis graphs the levels of expenditure and taxation over income, representing the different budget outcomes.
The areas where taxation (T) is less than government expenditure (G) results in a budget deficit. The point where they meet is equilibrium (G = T). Where T is greater than G is a budget surplus.
24. Changes in the Cash Rate caused by Changes in Monetary PolicyThe supply curves here represent the money supply (which the RBA controls though domestic market operations). If they wanted to implement contractionary monetary policy, they would decrease supply from S to S1, which causes the cash rate to rise from r to r1.
If they wanted to implement expansionary monetary policy, they would increase supply from S to S2, which causes the cash rate to fall from r to r2.
25. Crowding Out EffectThis is what happens when the government runs a budget deficit and chooses to borrow from the domestic private sector. Banks have a limited pool of funds to lend out, represented by the supply curve S on the left. If the government draws on these funds, they compete with businesses who want to use this money for investment (represented by the demand curve on the right).
This causes an increase in demand, which drives interest rates up, and subsequently there is a fall in demand for investment because of the higher costs of borrowing. So the government has ‘crowded them out’ of the market.
And That's It!
Of course, not all of them are going to be useful in every essay, and some of them are much harder than others (think: more marks!). Some of the essentials to know are the Tariff, Quota, and Subsidy diagrams, SRPC/LRPC, Multiplier effect, Lorenz Curve, Negative externalities, J-Curve, and fiscal/monetary policy!
Any questions/further clarifications, make sure to ask! Good luck, you've picked a great subject
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