AS Unit 1 Diagrams
All 14 diagrams required for Pearson Edexcel IAL AS Economics Unit 1 (WEC11/01) — with step-by-step explanation for each.
1.3.1 — Introductory Concepts
1.1Production Possibility Frontier (PPF)
What it shows: The PPF shows all combinations of two goods that an economy can produce when all resources are fully and efficiently employed.
- Point A (on curve): Productively efficient — all resources fully used
- Point B (inside): Inefficient — underemployment of resources (recession)
- Point C (outside): Currently unattainable with existing resources/technology
- PPF₂ (dashed): Outward shift = economic growth (more capital, better tech, skilled immigration)
- Opportunity cost: Moving along the PPF — producing more of one good requires giving up some of the other
Label both axes with specific goods, not just "Good X/Y." Show the shift with a dashed line and label it PPF₂. Always state the cause of the shift (e.g. "new technology improves productivity of all industries").
1.2Demand Curve — Movement vs Shift
Movement along D₁ (A→B): Caused only by a change in the good's own price. Price falls from P₁ to P₂ → quantity demanded extends from Q₁ to Q₂ (extension of demand).
- Shift right to D₂: Increase in demand at every price — caused by: ↑ income (normal good), ↑ price of substitute, ↓ price of complement, more advertising, population growth, change in taste
- Shift left to D₀: Decrease in demand — caused by opposite factors
Never say "demand increases because price falls" — that's a movement, not a shift. A shift = new curve. A movement = along existing curve.
1.3Supply Curve — Movement vs Shift
Movement along S₁ (A→B): Price rises from P₁ to P₂ → quantity supplied extends from Q₁ to Q₂ (extension of supply).
- S₂ (rightward shift): More supplied at every price — caused by: new technology, fall in input costs, subsidy received, improved weather
- S₀ (leftward shift): Less supplied at every price — caused by: rise in costs, new indirect tax, natural disaster
The supply curve shifts LEFT when a tax is imposed (tax is a cost to firms). It shifts RIGHT when a subsidy is given. These are the two most commonly tested supply shifts.
1.4Market Equilibrium, Excess Demand & Excess Supply
Equilibrium (E): Q demanded = Q supplied. No tendency for price to change. Market clears.
- P₁ below P*: Excess demand (shortage) — Qd > Qs. Buyers compete → price rises back toward P*
- If price above P*: Excess supply (surplus) — Qs > Qd. Firms cut price → price falls back toward P*
- Market forces automatically restore equilibrium
Always label P* and Q* (not just P and Q). The asterisk denotes the equilibrium value. Show the adjustment mechanism — excess demand/supply causes price to move back toward equilibrium.
1.3.4 — Price Determination & Surpluses
1.5Consumer & Producer Surplus
Consumer Surplus (blue triangle): The difference between what consumers are willing to pay (demand curve) and what they actually pay (P*). Area below D, above P*.
Producer Surplus (red triangle): The difference between the price producers receive (P*) and the minimum they would accept (supply curve). Area above S, below P*.
Total welfare = CS + PS. Free market equilibrium maximises total welfare. Any price control that reduces output below Q* creates a deadweight welfare loss.
Producer Surplus (red triangle): The difference between the price producers receive (P*) and the minimum they would accept (supply curve). Area above S, below P*.
Total welfare = CS + PS. Free market equilibrium maximises total welfare. Any price control that reduces output below Q* creates a deadweight welfare loss.
Taxes, subsidies, and price controls all change the sizes of CS and PS. A tax shifts S left → P rises → CS falls → PS may also fall → deadweight loss triangle appears.
1.6Specific Tax Incidence
Specific tax: Fixed amount per unit (e.g., £1/litre). Shifts S₁ left to S₂ by the tax amount — a parallel shift upward.
- Price rises from P₁ to P₂ — consumers pay more
- Net price received by producers falls to P₂ − tax — producers get less
- Tax incidence: Steeper D (inelastic demand) → consumers bear more of the tax burden
- Tax revenue = tax × Q₂ (the shaded rectangle)
- Output falls from Q₁ to Q₂ → deadweight welfare loss triangle
The more inelastic the demand, the more tax falls on consumers. Governments tax tobacco and fuel (inelastic demand) because it raises large revenue with little output reduction.
1.7Maximum Price (Price Ceiling)
Maximum price: A legal price ceiling set below the free market equilibrium P*. Purpose: make goods affordable (e.g. rent control, food price caps).
- At P_max: Qd > Qs → persistent shortage
- Suppliers reduce output (less profitable at lower price)
- Consumers demand more at the lower price
- Consequences: queuing, black markets, deteriorating quality
- If set above P*, it has no effect (market already below ceiling)
A maximum price MUST be set below equilibrium to be effective. A ceiling above equilibrium does nothing — the market continues at P*. Draw P* clearly above the ceiling line.
1.8Minimum Price (Price Floor)
Minimum price: A legal price floor set above the free market equilibrium P*. Examples: minimum wage, minimum alcohol unit price, EU agricultural price supports.
- At P_min: Qs > Qd → persistent surplus
- Consumers buy less (price is now higher)
- Producers supply more (higher price is attractive)
- Consequences: government must buy surplus, storage costs, waste
- Minimum wage: labour surplus = unemployment (more workers want jobs than firms want to hire)
A minimum price MUST be set above equilibrium to be effective. If below P*, it has no effect. Draw P* clearly below the floor line. Note the asymmetry with maximum price — floor creates surplus, ceiling creates shortage.
1.3.5 — Market Failure & Externalities
1.9Negative Externality of Production
Negative externality of production: External costs imposed on third parties (e.g., pollution from a factory). MSC > MPC at every output level.
- Market produces Qm (where MPC = MPB) — ignores external costs
- Social optimum is Q* (where MSC = MSB) — lower output
- Market over-produces relative to socially optimal level
- Welfare loss (WL) triangle: area between MSC and MPB from Q* to Qm
- Solution: Pigouvian tax = external cost → shifts MPC up to MSC → market produces Q*
Label ALL four curves: D=MPB=MSB, MPC (S), MSC. Label Qm and Q*. Shade the welfare loss triangle and label it WL. The external cost is the vertical gap between MPC and MSC.
1.10Positive Externality of Consumption
Positive externality of consumption: External benefits received by third parties (e.g., education — educated workers make everyone more productive). MSB > MPB.
- Market produces Qm (where MPB = MSC) — ignores external benefits
- Social optimum is Q* (where MSB = MSC) — higher output
- Market under-produces relative to social optimum
- Welfare loss triangle: between MSB and MPC from Qm to Q*
- Solution: subsidy to consumer = external benefit → demand shifts to MSB → Q* achieved
Examples: Education (trained workers help other firms), vaccines (herd immunity protects others), healthcare (healthier workers are more productive). The subsidy required = the external benefit (vertical gap between MSB and MPB).
1.3.2 — Elasticities
1.11Price Elasticity of Demand — Elastic vs Inelastic & Total Revenue
Elastic demand (left panel): A small price fall causes a large quantity rise → TR increases. Firms in competitive markets should cut prices to gain revenue.
Inelastic demand (right panel): A price fall causes only a small quantity rise → TR falls. Firms with inelastic demand (strong brands, addictive goods) can raise prices to increase TR.
Inelastic demand (right panel): A price fall causes only a small quantity rise → TR falls. Firms with inelastic demand (strong brands, addictive goods) can raise prices to increase TR.
The PED-TR relationship is tested every year. Key logic: elastic demand → consumers very sensitive to price → volume effect dominates. Always give a numerical example: "If PED = -2 and price rises 10%, quantity falls 20% → TR falls."
1.12Price Elasticity of Supply — Elastic vs Inelastic
Elastic supply (left): A small rise in price → large rise in quantity supplied. Firm has spare capacity, storable goods, or mobile factors. TR rises significantly with price.
Inelastic supply (right): A large rise in price → only small rise in quantity. Common for agricultural goods, scarce land, goods requiring long production times.
Inelastic supply (right): A large rise in price → only small rise in quantity. Common for agricultural goods, scarce land, goods requiring long production times.
In the short run, supply tends to be inelastic (fixed capital). In the long run, all factors can be adjusted → supply more elastic. This distinction is critical for commodity price analysis — supply shocks cause large short-run price spikes that dampen over time.