EDEXCEL A LEvel Economics

Diagram
practice Book

Student Name:
CONTENTS Microeconomics
Microeconomics Section 1 PPFs, Markets and the Allocation
Section 1 PPFs, Markets and the Allocation of Resources Page 3 of Resources
Section 2 Market Failure Page 15
1 In the boxes below, draw the appropriate and fully labelled production possibility frontier as
Section 3 Costs of production and Economies of Scale Page 26 requested

Section 4 Revenues and Profits, & Other Objectives Page 32 A A PPF showing balanced economic growth B A PPF showing that there are unemployed
resources i.e. the allocation of resources is
Section 5 Market Structures Page 40 productively inefficient

Section 6 The Labour Market Page 46

MAcroeconomics
Section 1 National Income and macroeconomic equilibrium Page 52

Section 2 Macroeconomic objectives Page 68

Section 3 financial markets and monetary policy Page 76 C A PPF showing an increase in production of D A PPF demonstrating a trade off with capital
capital goods but not consumer goods goods as more consumer goods are produced
Section 4 Fiscal policy and supply side policies Page 82

Section 5 The international economy Page 88

Section 6 Inequality and Developing Economies Page 102

E A PPF showing an increase in productivity in F A PPF demonstrating the impact of a natural

the capital goods industry, but not the disaster destroying a proportion of all factors
consumer goods industry of production

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 C Shade the area showing new total cost 7 On this short run average cost diagram below, and using different colours / hatchings / shading,
show the total cost when

Costs A output is D B output is E C output is F

MC
AC
Costs

ATC

Output

6 As the cost of collecting rubbish from the streets rises, the Town Council in Dilton has decided to raise D E F Output
the rent chargeable on the shops located in Main Street

A Define the terms ‘fixed cost’ and ‘variable cost’

8 On the diagram below, indicate:

A the range of outputs over which economies of scale are experienced

B the range of outputs over which diseconomies of scale are experienced

C the range of outputs over which constant returns to scale are experienced
B Adapt the cost curves for hairdresser ‘Crowning Glory’ appropriately to reflect this change
D the smallest amount of output that can be made whilst being productively efficient
C Shade the change in total cost if Crowning Glory attempts to minimise its average cost at all times
E the effect of external economies of scale

Costs
Costs
MC
LRAC
AC

Output
0 D F Output

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 7 The diagram below represents a price-making profit-maximising firm. Adapt the diagram to illustrate 9 A Write down the condition under which firms will shut down in the short-run
the impact on i) price ii) output and iii) profit if the firm experiences a fall in demand

Costs
and MC
revenue AC
B Adapt the diagram below to show the short-run shut down point for a price-taking firm

Costs ATC
and MC
revenue AVC

AR
MR Output

8 A hot chocolate vendor at a Christmas market faces significant competition from other hot chocolate
vendors. The diagram below represents her profit-maximising business AFC
i) Shade the area that corresponds to her total variable costs Output
ii) In a different colour, shade the area that corresponds to her total fixed costs
C Write down the condition under which firms will shut down in the long-run
Costs
and MC
revenue ATC

D Explain why this is a DIFFERENT condition to that in the short-run

AR = MR

AFC
Output

E Adapt the diagram below to show the long-run shut down point for a price-taking firm
iii) The cost of renting her hot drinks cart from the manufacturer increases 20%. Draw your own
diagram in the space below to show the impact of this change on i) price ii) output and iii) profit
Costs ATC
and MC
revenue AVC

AFC
Output

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Section 5 Market Structures 3 Using the double diagram below

A first show a perfectly competitive market, and an individual firm in that market, both in long-run
1 In the double diagram below, show the long run equilibrium position for a perfectly competitive firm equilibrium, as in questions 1 and 2 on the previous page
that has the objective of profit maximising. The diagram has been started for you
B demonstrate what happens to the individual firm’s position when demand for the output falls in the
market
The Market The Individual Firm
Market Costs
C shade any areas of loss or supernormal profit
price and
revenue
The Market The Individual Firm
Market Costs
price and
revenue

AR = MR

AR = MR

Market quantity Output

Market quantity Output

2 Using the double diagram below

A first show a perfectly competitive market, and an individual firm in that market, both in long-run
equilibrium, as in question 1 above 4 Walk & Go is a dog-walking service located in Warminster which aims to maximise its profits.
Within a 15mile radius there are 6 other similar dog-walking services, each offering slightly different
B demonstrate what happens to the individual firm’s position when a significant number of firms
lengths of walks, giving the owners plenty of choice
leave the market

C shade any areas of loss or supernormal profit A Briefly outline why Walk & Go most likely operates in a monopolistically competitive market

The Market The Individual Firm

Market Costs
price and
revenue

AR = MR

Market quantity Output

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 O An ageing population, causing a shrinking P Introduction of more free-market policies Now represent the same scenario on a Neoclassical AD/AS diagram
in the population of working age including increased privatisation and further
deregulation General LRAS
price
level

General LRAS General LRAS

price price
SRAS SRAS SRAS
level level

AD

Y Real GDP
Real GDP Real GDP

Using a Keynesian AD/AS diagram, show how net migration might affect the price level and amount
of real GDP produced
4 Keynesian versus Neoclassical perspectives
General
Outline 3 key differences between Keynesian and Neoclassical perspectives on the macroeconomy price AS
level

3
AD
5 Keynesian AS curves
Real GDP
Using a Keynesian AD/AS diagram, show how rising government spending on infrastructure will
affect the price level and amount of real GDP produced
6 PPFs and aggregate supply

General
Here are two diagrams, showing the PPF and the Aggregate Supply for an economy
price level AS
Capital Price
goods level
AS1

P1

AD

Real GDP AD1

Consumer goods Q1 Real GDP

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Section 3 Financial markets and monetary policy
8.Short-run and Long-run Phillips Curves B Adapt the AD/AS diagrams below to show the effects of each of the suggested changes to
monetary policy

1 8.Short-run
Monetary policy
and Long-run
transmission
Phillips
mechanism
Curves i) An increase in the base rate of interest ii) Greater use of asset purchases (Quantitative
set by the Central Bank Easing) by the Central Bank in response to
A The monetary policy transmission mechanism can demonstrate the links and relationships between falling confidence
changes in the base rate of interest (“Bank Rate”), and the price level and level of output in an economy.
Complete the following transmission mechanism diagram using the terms in the boxes below General General
price AS price AS
level level

P P

AD AD

Base rate Y Real GDP Y Real GDP

falls

iii) The use of foreign exchange reserves to buy iv) The use of Forward Guidance to indicate to
the domestic currency in order to engineer businesses and households that interest rates
an increase in its value are unlikely to rise further in the next 12 months

General General
price AS price AS
level level

Increase in Commercial banks Commercial banks P P

Consumption
output Increase reduce their savings reduce their
rises
in inflation interest rates mortgage rates AD AD

Y Real GDP Y Real GDP

Exports Investment
Borrowing Base rate falls banks reduce their
Imports interest rates v) The government introduces a Funding for vi) The government decides to reduce the supply
Lending scheme, in which small businesses of narrow money in the economy
find it easier to gain access to credit from banks
Hot money
ER falls Savings falls AD rises
flows out General General
price AS price AS
level level

Discretionary
Investment rises
income
P P

AD AD

Y Real GDP Y Real GDP

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 3 EXTENSION QUESTION: Trade and Quotas 4 EXTENSION QUESTION: Trade and Subsidies

This diagram shows the market for sweatshirts, with a quota being imposed to limit imports to 2 million This diagram shows a market in which the product can be produced domestically, but only for £10
units. Before the imposition of the quota, the equilibrium price was £8; after the quota the equilibrium each. This domestic price is much higher than the price of imports, at £6 each
rises to £10

Price Price
(£) (£) S (Domestic)
S (Domestic)

10 x

10 S (World) with quota

b c d
a b d e
c S (World) S (World)
8 6
e
f g h
f g h i D (Domestic) D (Domestic)

2 4 6 8 Quantity 2 5 8 Quantity
(millions) (millions)

Make some detailed notes about the economic effects on each of these stakeholders: A Describe the areas on the diagram that represent

Consumers i) domestic consumer surplus

ii) domestic producer surplus

Domestic producers

iii) the volume of imports

Global producers (importers)

B Add a new Domestic Supply curve to show the effect of a government subsidy of £2 per unit paid to
domestic producers

C On the diagram, shade in the total amount of subsidy that the government will pay to the industry

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 3 The Harrod-Domar model of development 4 Factors influencing growth and development

Complete the labelling of this diagram showing the Harrod-Domar model A Many developing countries are Price of
highly dependent on primary primary
products
products. Using your knowledge
of price elasticity of demand
and price elasticity of supply,
use a demand and supply
Low ? diagram to show why increasing
Low GDP specialisation in primary products
Growth can cause falling revenue in
developing countries

Quantity of primary products

B Using the axes to the right, Price of
explain why commodities often commodities
have highly volatile prices
Low ? Low ?

Which constraints on Growth and Development can be illustrated by using this model?
Quantity of commodities

C In the space below, explain why

General
capital flight might occur in a price level
developing economy. Then, on AS
the axes to the right, show the
Add to the diagram to show how an injection of aid may help to overcome this constraint, and explain effect of this on the economy of
that effect of that aid on a country such as Honduras or Rwanda. a developing economy
Explanation:

AD

Y Real GDP

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