diagrams

• elasticity of demand - perfectly elastic


  PED = infinity

  
• elasticity of demand - relatively elastic


  PED > 1

  
• elasticity of demand - unitary elastic


  PED = 1

  
• elasticity of demand - relativity inelastic


  PED < 1

  
• elasticity of demand - completely inelastic


  PED = 0

  
• elasticity of supply - perfectly elastic


  PES = infinity

  
• elasticity of supply - relatively elastic


  PES > 1

  
• elasticity of supply - unitary elastic


  PES = 1

  
• elasticity of supply - relatively inelastic


  PES < 1

  
• elasticity of supply - completely inelastic


  PES = 0

  
• PPF curve

  This diagram can be used to show economic growth ( a shift outwards in the PPF), opportunity cost, unemployed resources, productive efficiency (any point on the PPF curve), but not allocative efficiency.

  
• PPF curve - economic growth

  a PPF curve showing economic growth

  
• Minimum Price diagram

  A potenail solution to demerit goods e.g. Minmum price for alcohol in Scotland. Increasing the price

  from Pe to Pmin reduces consumption from Qe to Q1.

  
• Specific Tax

  A solution to demerit goods e.g. cigarettes. It internalises the externalities. The diagram can be used to show the impact of a tax on consumption (Q1 to Q2) and the tax revenue and the incidence of the tax on consumers and producers. The size of the tax per unit is always the vertical distance between the supply curves.

  
• Maximum price

  Used to make merit goods more affordable e.g. maximum rents. Not such an effective policy because it can reduce supply (Qo to Q1), creating excess demand (Qo to Q2)

  
• Subsidy

  Solution to under consumption and production of merit goods. Internalises the positive externalities.

  Shows the cost to government of subsidy (shaded area) The size of the subsidy per unit is always the

  vertical distance between the supply curves.

  
• Ad Valorem Tax


  e.g. VAT. because it is a percentage tax the size of the increases as the price increases. Hence the supply curves diverge.

  
• Marginal Model - Demerit good - negative externalities in consumtpion

  negative externalities in consumtpion e.g. smoking and passive smoking. This diagram shows why demerit goods may be overconsumed in a free market because externalities are ignored in decision making. Consumption occurs are Q and not the socially desirable level of Q1. This is the most common marginal diagram as it can be used for alcohol, cigarettes,

  gambling, fast food etc.

  
• Marginal Model - Demerit good - negative externalities in production

  negative externalities in production e.g. electricity production from coal and pollution. This grandam shows why demerit goods may be over consumed in a free market because externalities are ignored in decision making by firms. Production occurs are Q and not the socially desirable level of Q1

  
• Marginal Model - Merit good - positive externalities in consumption

  positive externalities in consumption e.g. vaccination or public transport. This diagram shows why merit goods may be under consumed in a free market because externalities are often ignored in decision making. Consumption occurs are Q and not the socially desirable level of Q1

  
• Marginal Model - Merit good - positive externalities in production

  positive externalities in production e.g. infrastructure projects, such as a new airport, or motorways. This diagram shows why Merit goods may be under consumed in a free market because externalities are often ignored in decision making, production occurs are Q and not the socially desirable level of Q1

  
• Diminishing marginal utility

  
• Long run aggregate supply curve

  
• import tariffs

  
• the laffer curve is a graph that shows the relationship between tax revenue and tax rate