Every diagram question, answered

All 197 questions from the diagram games — each on its own page, with the answer explained on the lettered diagram. Or skip the reading and play the games.

Supply & demand

Which point is the market equilibrium? (Supply & demand)
The price is fixed at £8. Which point shows the quantity DEMANDED? (Supply & demand)
At the fixed price of £8, this market has… (Supply & demand)

Shift in demand

Incomes rise and this is a normal good, shifting D1 to D2. Which point is the NEW equilibrium? (Shift in demand)
What could cause this rightward SHIFT of the demand curve? (Shift in demand)
Why does price rise from £5 to £6 after the shift? (Shift in demand)

Consumer & producer surplus

Which area is CONSUMER surplus? (Consumer & producer surplus)
Which area is PRODUCER surplus? (Consumer & producer surplus)
Which area shows TOTAL economic welfare (society's surplus) at equilibrium? (Consumer & producer surplus)

Indirect tax

A £4-per-unit tax shifts S to S + tax. Which point on the price axis is the price CONSUMERS now pay? (Indirect tax)
Which point on the price axis is the price PRODUCERS receive per unit, AFTER handing the tax to the government? (Indirect tax)
Which area is the government's TAX REVENUE? (Indirect tax)
Which area is the DEADWEIGHT WELFARE LOSS from the tax? (Indirect tax)
Which area is CONSUMER SURPLUS after the tax? (Indirect tax)
Which area is PRODUCER SURPLUS after the tax? (Indirect tax)
EVALUATION: Why are indirect taxes criticised as REGRESSIVE? (Indirect tax)
EVALUATION: Demand for sugar is price INELASTIC. What does this mean for a sugar tax? (Indirect tax)
EVALUATION: Which unintended consequence could turn this tax into a GOVERNMENT FAILURE? (Indirect tax)

Subsidy

Maximum price

A maximum price of £3 is imposed (e.g. a rent cap). Which point shows the quantity actually TRADED? (Maximum price)
Which distance shows the SHORTAGE the cap creates? (Maximum price)
When does a maximum price actually cause a shortage? (Maximum price)
With the cap in place, which area is CONSUMER SURPLUS? (Maximum price)
With the cap in place, which area is PRODUCER SURPLUS? (Maximum price)
Which area is the DEADWEIGHT WELFARE LOSS from the cap? (Maximum price)

Minimum price

A minimum price of £7 is imposed (think alcohol floor price). Which point shows the quantity actually TRADED? (Minimum price)
Which distance shows the EXCESS SUPPLY the floor creates? (Minimum price)
For a minimum price to have any effect it must be set… (Minimum price)
With the floor in place, which area is CONSUMER SURPLUS? (Minimum price)
With the floor in place, which area is PRODUCER SURPLUS on the units actually sold? (Minimum price)
Which area is the DEADWEIGHT WELFARE LOSS from the floor? (Minimum price)

Negative production externality

A factory pollutes: MSC sits above MPC. Which point is the FREE-MARKET outcome? (Negative production externality)
Which point is the SOCIAL optimum, where society would like this market to be? (Negative production externality)
Which area is the WELFARE LOSS from the market overproducing? (Negative production externality)
Which distance shows the MARGINAL EXTERNAL COST of the LAST unit the free market produces? (Negative production externality)
A corrective tax shifts MPC up to MPC + tax. Through which point must the NEW curve pass to fix the market? (Negative production externality)

Positive consumption externality

Vaccinations benefit others too: MSB sits above MPB. Which point is the FREE-MARKET outcome? (Positive consumption externality)
Which point is the SOCIAL optimum? (Positive consumption externality)
Which area is the potential WELFARE GAIN society misses at the free-market quantity? (Positive consumption externality)
Which distance shows the MARGINAL EXTERNAL BENEFIT of the last unit the market consumes? (Positive consumption externality)
A subsidy shifts S down to S − subsidy. Through which point must the NEW curve pass to reach the social optimum? (Positive consumption externality)

Positive production externality

A tech firm trains workers who spread skills to other firms: MSC sits BELOW MPC. Which point is the FREE-MARKET outcome? (Positive production externality)
Which point is the SOCIAL optimum? (Positive production externality)
Which distance shows the MARGINAL EXTERNAL BENEFIT of the last unit the market produces? (Positive production externality)
Which area is the WELFARE GAIN society misses at the free-market output? (Positive production externality)
A subsidy shifts MPC down. Through which point must MPC − subsidy pass to deliver the social optimum? (Positive production externality)

Negative consumption externality

Smoking harms bystanders: MSB sits BELOW MPB. Which point is the FREE-MARKET outcome? (Negative consumption externality)
Which point is the SOCIAL optimum? (Negative consumption externality)
Which distance shows the MARGINAL EXTERNAL COST of the last unit the market consumes? (Negative consumption externality)
Which area is the WELFARE LOSS from overconsumption? (Negative consumption externality)
A* question: at what level must a MINIMUM PRICE be set to cut consumption to the social optimum (Q = 3)? (Negative consumption externality)

Production possibility frontier

Which point shows an economy with UNEMPLOYED resources (productive inefficiency)? (Production possibility frontier)
Which point is currently UNATTAINABLE for this economy? (Production possibility frontier)
Moving from A (4 consumer, 8 capital) to B (9 consumer, 3 capital): what is the OPPORTUNITY COST? (Production possibility frontier)

AD/AS equilibrium

Which point is the macroeconomic equilibrium? (AD/AS equilibrium)
AD is total demand in the economy. Which expression gives its components? (AD/AS equilibrium)
What does the HORIZONTAL axis of this diagram measure? (AD/AS equilibrium)
The price level is stuck at P₂ = 8. Which point shows the real output firms are willing to SUPPLY? (AD/AS equilibrium)
At the price level P₂ = 8, above equilibrium, this economy has… (AD/AS equilibrium)
Now the price level is at P₃ = 3, BELOW equilibrium. What is happening? (AD/AS equilibrium)

AD shift right (with multiplier)

The government raises NHS funding, so G rises and AD shifts from AD1 to AD2. WHY does a second shift, AD2 to AD3, follow? (AD shift right (with multiplier))
Which point is the FINAL equilibrium, once the multiplier has worked through? (AD shift right (with multiplier))
Which point is the equilibrium immediately after the rise in G, but BEFORE the multiplier rounds happen? (AD shift right (with multiplier))
Why does unemployment fall as the economy moves from E to G? (AD shift right (with multiplier))
The cost of the stimulus: why does demand-pull inflation appear as output reaches Y₃? (AD shift right (with multiplier))
Which distance measures the EXTRA real output the multiplier delivers, over and above the initial injection? (AD shift right (with multiplier))

AD shift left (recession)

Investment collapses and AD shifts left from AD1 to AD2. Which distance is the FALL in real output? (AD shift left (recession))
Which point is the recession equilibrium? (AD shift left (recession))
Why does unemployment RISE as the economy moves from E to F? (AD shift left (recession))
The gap between Y₂ and Y₁ is a negative output gap. On the KEYNESIAN view, what happens next if wages are sticky? (AD shift left (recession))
On the Keynesian view, what would REVERSE this recession? (AD shift left (recession))
EVALUATION: why is this negative output gap especially damaging if it PERSISTS? (AD shift left (recession))

SRAS shift left (cost-push inflation)

Which of these shifts SRAS to the LEFT? (SRAS shift left (cost-push inflation))
Costs rise and SRAS1 shifts to SRAS2. Which point is the NEW equilibrium? (SRAS shift left (cost-push inflation))
Why is this outcome called STAGFLATION — the double hit? (SRAS shift left (cost-push inflation))
The wage-price spiral: how does it feed cost-push inflation? (SRAS shift left (cost-push inflation))
Which distance measures the RISE IN COSTS that shifted the curve — the vertical gap between SRAS1 and SRAS2 at the new output? (SRAS shift left (cost-push inflation))
EVALUATION: why is cost-push inflation usually judged WORSE than demand-pull inflation? (SRAS shift left (cost-push inflation))

LRAS shift right (long-run growth)

Which of these shifts LRAS right from LRAS₁ to LRAS₂? (LRAS shift right (long-run growth))
LRAS shifts right to LRAS₂ and AD is unchanged. Which point is the NEW macroeconomic equilibrium? (LRAS shift right (long-run growth))
Which point on the price axis is the NEW price level after the LRAS shift? (LRAS shift right (long-run growth))
Output rises from Y₁ to Y₂ while the price level FALLS from P₁ to P₂. Why does inflation fall rather than rise? (LRAS shift right (long-run growth))
EVALUATION: why is supply-side policy said to have NO TRADE-OFF — the closest economics comes to a free lunch? (LRAS shift right (long-run growth))

Keynesian LRAS (spare capacity)

The economy is in a deep recession, so AD₁ crosses the Keynesian LRAS on its FLAT range. Which point is that equilibrium? (Keynesian LRAS (spare capacity))
AD rises while the economy is on the FLAT range of the Keynesian LRAS. What happens? (Keynesian LRAS (spare capacity))
Which point shows FULL-EMPLOYMENT output, where the Keynesian LRAS becomes vertical? (Keynesian LRAS (spare capacity))
The SAME increase in AD happens near full employment instead — AD₂ crossing at F. What does the economy get? (Keynesian LRAS (spare capacity))
EVALUATION: what exactly do Keynesians and Classicals DISAGREE about? (Keynesian LRAS (spare capacity))
EVALUATION: a supply-side policy shifts LRAS right while the economy is stuck at E on the flat range. What happens? (Keynesian LRAS (spare capacity))

Laffer curve

Loanable funds (crowding out)

What shifts the DEMAND for loanable funds right from D₁ to D₂? (Loanable funds (crowding out))
Government borrowing shifts demand from D₁ to D₂. Which point is the NEW equilibrium? (Loanable funds (crowding out))
Which point on the interest-rate axis shows the HIGHER interest rate the government's borrowing produces? (Loanable funds (crowding out))
Complete the crowding-out chain: government borrowing → interest rate rises → …? (Loanable funds (crowding out))
Which DISTANCE shows the private investment that has been crowded out? (Loanable funds (crowding out))
EVALUATION: when does government spending CROWD IN private investment instead? (Loanable funds (crowding out))

Currency depreciation

A cut in UK interest rates moves the supply of pounds from S₁ to S₂. What is actually happening in the market to push it right? (Currency depreciation)
Which point on the exchange-rate axis is the DEPRECIATED pound? (Currency depreciation)
Which point is the NEW equilibrium after the supply of pounds shifts to S₂? (Currency depreciation)
The pound has fallen from e₁ to e₂. What happens to UK exports? (Currency depreciation)
EVALUATION: who LOSES from the depreciation? (Currency depreciation)

Currency appreciation (hot money)

What shifts the DEMAND for pounds right from D₁ to D₂? (Currency appreciation (hot money))
Which point on the exchange-rate axis is the APPRECIATED pound? (Currency appreciation (hot money))
Which point is the NEW equilibrium after demand for pounds shifts to D₂? (Currency appreciation (hot money))
The pound has appreciated from e₁ to e₂. What happens to UK IMPORTS? (Currency appreciation (hot money))
What is the cost of the appreciation for UK EXPORTERS, and where does the chain end up? (Currency appreciation (hot money))
EVALUATION: when you analyse an interest-rate rise, why link it to the EXCHANGE RATE before the inflation effect? (Currency appreciation (hot money))

Tariff

J-curve

PPF outward shift (economic growth)

The frontier shifts out from PPF1 to PPF2. What causes that? (PPF outward shift (economic growth))
Which point was UNATTAINABLE before the growth, but is attainable once the frontier has shifted out to PPF2? (PPF outward shift (economic growth))
Which point shows an economy with idle resources — unemployed workers and unused capital? (PPF outward shift (economic growth))
What is the difference between ACTUAL and POTENTIAL growth on this diagram? (PPF outward shift (economic growth))
The gold arrows run from PPF1 out to PPF2 at one fixed level of capital goods. Which arrow would be WRONG for economic growth? (PPF outward shift (economic growth))

Lorenz curve

What does the straight 45° line represent? (Lorenz curve)
Which point shows the share of total income going to the poorest 70% of the population BEFORE redistribution? (Lorenz curve)
Which curve shows the MORE unequal distribution of income? (Lorenz curve)
Progressive income tax funds transfer payments — the Robin Hood move. What does that do to the Lorenz curve? (Lorenz curve)
EVALUATION: what does the Gini coefficient actually measure? (Lorenz curve)
Which distance shows how much redistribution raised the income share of the poorest 70%? (Lorenz curve)

Shift in supply

New technology cuts firms' production costs, shifting S1 to S2. Which point is the NEW equilibrium? (Shift in supply)
What could cause this rightward SHIFT of the supply curve? (Shift in supply)
What happens to price and quantity after the shift? (Shift in supply)
Why does the price fall from £5 to £4 after the shift? (Shift in supply)
After the shift, what has happened to DEMAND? (Shift in supply)
EVALUATION: demand for this good is price INELASTIC. What does that mean for the same rightward supply shift? (Shift in supply)

Monopoly (supernormal profit)

The monopolist is a profit maximiser. At which point does it decide its OUTPUT? (Monopoly (supernormal profit))
Which point on the price axis is the monopoly price, Pm? (Monopoly (supernormal profit))
Which area is the monopolist's SUPERNORMAL PROFIT? (Monopoly (supernormal profit))
Compared with the competitive outcome at G, which area is the DEADWEIGHT WELFARE LOSS? (Monopoly (supernormal profit))
Which point is the ALLOCATIVELY EFFICIENT outcome? (Monopoly (supernormal profit))
EVALUATION: the monopolist keeps rectangle ABFE year after year. What is the strongest case IN FAVOUR of allowing it? (Monopoly (supernormal profit))

Perfect competition (short-run profit)

Why is this firm's AR = MR curve a HORIZONTAL line? (Perfect competition (short-run profit))
Which point is the firm's profit-maximising output in the SHORT RUN? (Perfect competition (short-run profit))
Which area is the firm's SUPERNORMAL PROFIT? (Perfect competition (short-run profit))
Which point shows PRODUCTIVE EFFICIENCY — the bottom of the average cost curve? (Perfect competition (short-run profit))
There are no barriers to entry. What happens to this profit in the LONG RUN? (Perfect competition (short-run profit))
EVALUATION: what does perfect competition fail to deliver once profit has been competed away? (Perfect competition (short-run profit))

Monopsony labour market

Which point decides how many workers the monopsonist EMPLOYS? (Monopsony labour market)
Which point is the WAGE the monopsonist actually pays? (Monopsony labour market)
Why does MCL lie ABOVE ACL, the supply curve? (Monopsony labour market)
Which distance measures the EXPLOITATION of the workers — the gap between what they are worth and what they are paid? (Monopsony labour market)
Which area is the WELFARE LOSS caused by the monopsonist's under-hiring? (Monopsony labour market)
EVALUATION: a minimum wage is set at Wc (£6). What happens in THIS market? (Monopsony labour market)

Kinked demand (oligopoly)

Which point is the KINK — the going price the firm is currently charging? (Kinked demand (oligopoly))
Why is demand ELASTIC above the kink? (Kinked demand (oligopoly))
Why is demand INELASTIC below the kink? (Kinked demand (oligopoly))
Which distance is the DISCONTINUITY in marginal revenue — the MR gap? (Kinked demand (oligopoly))
MC₁ rises to MC₂ — the firm's costs go up. What happens to the price? (Kinked demand (oligopoly))
EVALUATION: prices in a market have not moved for two years. What does this diagram let you say about it? (Kinked demand (oligopoly))

Free trade at the world price (imports)

Before any trade, this market settles where domestic supply crosses domestic demand. Which point is that no-trade (autarky) equilibrium? (Free trade at the world price (imports))
The economy opens to free trade at the world price PW. Which distance shows IMPORTS? (Free trade at the world price (imports))
Why does opening this market to trade make domestic CONSUMERS better off? (Free trade at the world price (imports))
Which area is the GAIN in consumer surplus from opening to trade? (Free trade at the world price (imports))
Which area is PRODUCER SURPLUS once the market trades at the world price? (Free trade at the world price (imports))
EVALUATION: what is the strongest cost of opening this market to imports? (Free trade at the world price (imports))

Import quota

What does an import quota actually do? (Import quota)
With imports capped, total supply becomes Sd + quota. Which point is the market outcome after the quota? (Import quota)
Which distance shows IMPORTS after the quota? (Import quota)
How does the quota's effect on the domestic PRICE compare with a tariff's? (Import quota)
Who receives the higher price Pq on the units that still come in under the quota? (Import quota)
Why does domestic supply rise after the quota is imposed? (Import quota)

Every diagram question, answered

Supply & demand

Shift in demand

Consumer & producer surplus

Indirect tax

Subsidy

Maximum price

Minimum price

Negative production externality

Positive consumption externality

Positive production externality

Negative consumption externality

Production possibility frontier

AD/AS equilibrium

AD shift right (with multiplier)

AD shift left (recession)

SRAS shift left (cost-push inflation)

LRAS shift right (long-run growth)

Keynesian LRAS (spare capacity)

Laffer curve

Loanable funds (crowding out)

Currency depreciation

Currency appreciation (hot money)

Tariff

J-curve

PPF outward shift (economic growth)

Lorenz curve

Shift in supply

Monopoly (supernormal profit)

Perfect competition (short-run profit)

Monopsony labour market

Kinked demand (oligopoly)

Free trade at the world price (imports)

Import quota

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