Edexcel A-Level Economics (9EC0) | Theme 1 and Theme 3
A single revision page for the microeconomics diagrams used across the Edexcel Theme 1 and Theme 3 notes. Each card keeps the original diagram image and adds a quick explanation of what to show in an exam answer.
The curve shows scarcity, opportunity cost and productive efficiency. Points on the frontier are productively efficient, points inside it show unemployed or inefficiently used resources, and points beyond it are currently unattainable.
Use in exams: Use it for trade-offs, opportunity cost, productive efficiency and short-run spare capacity.
An outward shift represents economic growth caused by more or better-quality resources, improved technology, or higher productivity. An inward shift represents a loss of productive potential.
Use in exams: Use it when explaining long-run growth, natural disasters, investment, education, migration or technological progress.
A fall in price causes an extension down the demand curve, while a rise in price causes a contraction up the curve. The demand curve itself does not shift.
Use in exams: Use it when the only direct cause is a change in the price of the product itself.
A rightward shift means consumers are willing and able to buy more at every price. A leftward shift means demand has fallen at every price.
Use in exams: Use it for changes in income, tastes, advertising, substitutes, complements, population or expectations.
A rise in price normally causes an extension up the supply curve, while a fall in price causes a contraction down the curve. The supply curve itself does not shift.
Use in exams: Use it when producers respond to a price change rather than a change in production conditions.
A rightward shift means firms are willing and able to supply more at every price. A leftward shift means supply has fallen at every price.
Use in exams: Use it for changes in costs, technology, indirect taxes, subsidies, weather, regulation or the number of firms.
Equilibrium occurs where quantity demanded equals quantity supplied. At this point there is no tendency for price to rise or fall, assuming ceteris paribus.
Use in exams: Use it as the starting point before showing a shift, shortage, surplus or intervention.
At a price below equilibrium, consumers want to buy more than firms are willing to supply. Competitive pressure should push prices up toward equilibrium.
Use in exams: Use it for shortages, rationing, queues and maximum price controls below equilibrium.
At a price above equilibrium, firms want to supply more than consumers want to buy. Competitive pressure should push prices down toward equilibrium.
Use in exams: Use it for unsold stock, downward price pressure and minimum price controls above equilibrium.
A shift in demand or supply creates temporary disequilibrium. The new intersection gives the new market price and quantity.
Use in exams: Use it as a general demand and supply framework when the context asks for market impact.
A rise in demand creates excess demand at the original price. Price then rises, encouraging more supply and reducing quantity demanded until the market clears.
Use in exams: Use it for rising popularity, higher income for normal goods, or higher prices of substitutes.
A rise in supply creates excess supply at the original price. Price then falls, encouraging consumers to buy more until the market reaches a new equilibrium.
Use in exams: Use it for lower costs, productivity improvements, subsidies, new firms or improved technology.
Steeper demand curves are more price inelastic, while flatter curves are more price elastic. Perfectly inelastic demand is vertical, and perfectly elastic demand is horizontal.
Use in exams: Use it when explaining the effect of price changes, taxes or market power on revenue and quantity demanded.
Steeper supply curves are more price inelastic, while flatter curves are more price elastic. Elasticity depends on spare capacity, stock levels, production time and factor mobility.
Use in exams: Use it when analysing how quickly firms can respond to price changes or demand shocks.
Consumer surplus is the extra welfare buyers gain when they pay less than they were willing to pay. Producer surplus is the extra welfare sellers gain when they receive more than the minimum they were willing to accept.
Use in exams: Use it to analyse welfare changes, allocative efficiency and the impact of market interventions.
Higher supply lowers price and raises quantity. Consumer surplus usually increases because consumers pay less and buy more, while producer surplus changes depending on the size of the price fall and quantity rise.
Use in exams: Use it for subsidies, productivity improvements, lower input costs and welfare analysis.
Higher demand raises price and quantity. Producer surplus usually increases because firms sell more at a higher price, while consumer surplus changes depending on the new price and quantity.
Use in exams: Use it when a demand shock changes welfare, such as a rise in incomes or consumer confidence.
The vertical distance between the old and new supply curves is the tax per unit. The tax burden is shared between consumers and producers depending on the relative elasticities of demand and supply.
Use in exams: Use it for taxes on goods with external costs, demerit goods and government revenue.
When demand is price inelastic, consumers bear more of the tax and quantity falls by less. When demand is price elastic, producers bear more of the tax and quantity falls by more.
Use in exams: Use it to evaluate whether a tax will reduce consumption or mainly raise revenue.
A subsidy reduces firms' costs, increasing supply. The benefit is shared between consumers and producers depending on relative elasticities, while government spending covers the subsidy cost.
Use in exams: Use it for merit goods, positive externalities and policies designed to increase output.
The market ignores external costs, so marginal private cost is below marginal social cost. This causes overproduction and a deadweight welfare loss.
Use in exams: Use it for pollution, congestion, carbon emissions and policies such as taxation or regulation.
Consumers only consider private benefits, so marginal private benefit is below marginal social benefit. The market under-consumes the good relative to the social optimum.
Use in exams: Use it for merit goods, education, healthcare, vaccination and subsidy arguments.
The tax shifts supply left and creates a gap between the price consumers pay and the price producers receive. The tax per unit multiplied by the new quantity gives government revenue.
Use in exams: Use it to analyse demerit goods, external costs and the trade-off between revenue and lower consumption.
The subsidy shifts supply right and creates a gap between the price consumers pay and the price producers receive. The subsidy per unit multiplied by the new quantity gives total government expenditure.
Use in exams: Use it for merit goods, positive externalities, affordability and intervention costs.
A maximum price is only effective if it is set below the market equilibrium. It makes the good cheaper for some consumers but creates a shortage.
Use in exams: Use it for rent controls, essential goods and evaluation of shortages or black markets.
A minimum price is only effective if it is set above the market equilibrium. It can raise producer incomes or reduce consumption but creates a surplus.
Use in exams: Use it for agricultural prices, alcohol pricing, labour markets and intervention evaluation.
Profit is maximised at the output where the extra cost of producing one more unit equals the extra revenue from selling it. Price is then read from the AR curve.
Use in exams: Use it when comparing profit maximisation with revenue maximisation, sales maximisation or satisficing.
Total revenue is maximised where marginal revenue is zero. Beyond this output, extra sales reduce total revenue because MR becomes negative.
Use in exams: Use it for firms prioritising market share, manager rewards linked to sales, or growth objectives.
Sales maximisation means producing the greatest output possible while still covering average costs. The firm earns normal profit at AR equals AC.
Use in exams: Use it when firms want growth or market share but must still avoid making a loss.
A perfectly competitive firm is a price taker, so each extra unit is sold at the same price. This makes AR equal to MR, and total revenue rises at a constant rate.
Use in exams: Use it when explaining why individual firms in perfect competition face perfectly elastic demand.
A firm with market power must lower price to sell more output. Marginal revenue lies below average revenue because extra sales reduce the price on previous units.
Use in exams: Use it for monopoly, oligopoly and monopolistic competition diagrams.
Short-run cost curves are shaped by diminishing returns. MC typically falls at first then rises, cutting AVC and AC at their minimum points.
Use in exams: Use it for output decisions, diminishing returns and shutdown analysis.
The LRAC curve falls when economies of scale dominate and rises when diseconomies of scale dominate. The minimum point shows the lowest average cost attainable in the long run.
Use in exams: Use it for economies of scale, diseconomies of scale, natural monopoly and minimum efficient scale.
As output expands, average costs may fall because of purchasing, technical, financial, managerial, marketing or risk-bearing economies. Beyond the efficient scale, diseconomies can push LRAC upward.
Use in exams: Use it for business growth, market concentration, barriers to entry and natural monopoly.
The firm produces where MC equals MR, then charges the price on the AR curve. If price exceeds average cost at that output, the shaded rectangle represents supernormal profit.
Use in exams: Use it for monopoly, monopolistic competition, short-run perfect competition and barriers to entry.
The firm still produces where MC equals MR, but the price from AR is below average cost. The shaded rectangle shows the loss per unit multiplied by output.
Use in exams: Use it for short-run losses, market exit and the adjustment process in perfect competition.
If price is below average variable cost, the firm cannot cover the extra variable costs of production. Shutting down limits losses to fixed costs.
Use in exams: Use it for short-run survival, loss minimisation and when firms should leave a market.
In long-run perfect competition, firms produce at the lowest average cost and price equals marginal cost. This gives productive and allocative efficiency, but not necessarily dynamic efficiency.
Use in exams: Use it when comparing market structures and judging whether consumers benefit.
A firm with market power restricts output and charges a price above marginal cost. It may also produce away from the minimum point of AC, although supernormal profit can fund dynamic efficiency.
Use in exams: Use it for monopoly, oligopoly, regulation and comparisons with perfect competition.
The industry sets the equilibrium price. Each individual firm is too small to influence price, so it faces a horizontal demand curve at the market price.
Use in exams: Use it to explain price taking, perfectly elastic demand and the link between market and firm diagrams.
In the short run, a perfectly competitive firm can earn supernormal profit if market price is above average cost at the output where MC equals MR.
Use in exams: Use it before explaining how new firms enter and remove supernormal profit in the long run.
A perfectly competitive firm makes a loss if market price is below average cost at the output where MC equals MR. It may continue producing in the short run if it covers AVC.
Use in exams: Use it before explaining how firms leave the market and losses are removed in the long run.
Supernormal profit attracts new firms into the industry. Industry supply rises, market price falls, and each firm's revenue curve shifts down until AR equals AC.
Use in exams: Use it for the long-run adjustment process and the role of low barriers to entry.
Losses cause some firms to leave the industry. Industry supply falls, market price rises, and each remaining firm's revenue curve shifts up until AR equals AC.
Use in exams: Use it to show how perfect competition removes losses in the long run.
In monopolistic competition, low barriers to entry mean supernormal profits are competed away. Product differentiation leaves the firm with downward-sloping demand.
Use in exams: Use it for long-run monopolistic competition and excess capacity.
Colluding firms can act like a monopoly by restricting total output and raising price. This can increase supernormal profit but worsens consumer welfare.
Use in exams: Use it for cartels, price fixing, market concentration and competition policy.
Each firm has an incentive to choose the dominant strategy and compete, even if both firms would be better off if they could trust each other to collude.
Use in exams: Use it for interdependence, dominant strategy, Nash equilibrium and unstable collusion.
Demand is more elastic above the current price because rivals may not follow a price rise, and more inelastic below it because rivals may match a price cut. The gap in MR helps explain stable prices.
Use in exams: Use it for non-price competition, interdependence and price rigidity in oligopoly.
A monopoly can split consumers into groups with different elasticities of demand. It charges a higher price where demand is more inelastic and a lower price where demand is more elastic.
Use in exams: Use it for rail fares, student discounts, peak pricing and welfare evaluation.
A monopsonist faces the whole labour supply curve, so hiring more workers requires raising the wage. MCL lies above ACL, and the firm employs where MCL equals MRP.
Use in exams: Use it for employer power, labour exploitation, minimum wages and public sector labour markets.
Firms hire workers because labour helps produce output and revenue. The labour demand curve slopes downward because marginal physical product often falls as more workers are added.
Use in exams: Use it for derived demand, productivity changes, output price changes and labour demand shifts.
Higher wages usually encourage more labour supply, but for some individuals very high wages may increase the desire for leisure, creating a backward-bending supply curve.
Use in exams: Use it for substitution and income effects, occupational labour supply and wage incentives.
In a competitive labour market, the wage rate is determined by the interaction of labour demand and labour supply. Changes in either curve change both wages and employment.
Use in exams: Use it for wage differences, labour shortages, migration, skills and occupational labour markets.
If the legal minimum wage is above the competitive equilibrium, more workers want jobs than firms want to hire. This may create unemployment, though outcomes depend on labour market conditions.
Use in exams: Use it for wage inequality, unemployment risk, monopsony evaluation and labour market intervention.
In a natural monopoly, average costs fall over the relevant range of output. Public ownership may set a lower price and higher output than a private monopoly, though incentives may differ.
Use in exams: Use it for natural monopoly, state ownership, privatisation, regulation and efficiency evaluation.