Diagrams

• What does the PPF stand for in microeconomics?

  Production possibility frontier
• What does the PPF show?

  Possible production combinations of two goods

  
• What do points on the PPF represent?

  Productively efficient production
• What does the slope of the PPF represent?

  Opportunity cost of producing one more apple
• How does opportunity cost change as more apples are produced?

  It increases due to diminishing returns
• What can cause a rightward shift in demand?

  Change in tastes
• How does an increase in advertising affect demand?

  It can cause demand to shift right
• What happens to demand for a normal good when real incomes increase?

  Demand shifts right
• What happens to demand for an inferior good when real incomes increase?

  Demand shifts left

  
• What effect does a decrease in the price of a complementary good have on demand?

  It shifts demand right
• What happens when the price of a substitute good increases?

  Demand shifts right
• What does a fall in the price of the good itself lead to?

  Movement along the demand curve
• What is the result of a rightward shift in demand?

  Higher price and higher quantity

  
• What can cause a rightward shift in supply?

  Reduced labour costs

  
• How do technological improvements affect supply?

  They can shift supply right
• What happens to price and quantity when supply shifts right?

  Price decreases and quantity increases

  
• What does the price mechanism respond to?

  A shortage at price p
• What is the rationing function of the price mechanism?

  Price rises to reduce demand
• What does the incentive function of the price mechanism do?

  Encourages greater production as price increases
• What does the signalling function of the price mechanism indicate?

  Signals firms to enter the market
• What happens to the market equilibrium price due to the price mechanism?

  Moves from price p to new price p1
• What does a negative externality in production indicate?

  MPB does not equal MPC
• What is the socially optimal outcome for negative externalities?

  Where MSC equals MSB
• What does welfare loss due to negative externalities represent?

  Overproduction of the good
• What does a positive externality in consumption indicate?

  MPB equals MPC
• What is the socially optimal outcome for positive externalities?

  Where MSB equals MSC
• What does underconsumption in positive externalities represent?

  Welfare loss ABE
• What does a negative externality in consumption indicate?

  MPB equals MPC
• What is the socially optimal outcome for negative externalities in consumption?

  Where MSB equals MSC
• What does overconsumption in negative externalities represent?

  Welfare loss ABE
• What does a positive externality in production indicate?

  MPB equals MPC
• What is the socially optimal outcome for positive externalities in production?

  Where MSB equals MSC
• What does underproduction in positive externalities represent?

  Welfare loss ABE
• What does a maximum price set below equilibrium lead to?

  Shortage of q1-q2
• What is the effect of a maximum price on firm revenue?

  Fall in firm revenue and producer surplus
• What does a minimum price set above equilibrium lead to?

  Surplus of q1-q2
• What does a minimum price cause in terms of welfare loss?

  Welfare loss shown by shaded area
• What effect does a tax have on supply?

  Shifts supply left from S to S1
• What happens to price and quantity when a tax is imposed?

  Price increases and quantity decreases
• What do the red and blue areas represent in tax incidence?

  Consumer and producer incidence