O Level Diagrams
All required diagrams for Cambridge IGCSE / O Level Economics — Paper 1 (Microeconomics) and Paper 2 (Macroeconomics & Global Economy).
PAPER 1 — BASIC ECONOMIC CONCEPTS
O.1Production Possibility Curve (PPC)
PPC shows all combinations of two goods when all resources are fully used.
- A (on curve): Productively efficient
- B (inside): Inefficient — underemployed resources
- C (outside): Currently unattainable
- Opportunity cost: Moving along the curve — more of one good means less of the other
- PPC₂ shifts outward: Economic growth — more resources, better technology
Always state WHY the PPC shifts. "Better technology → more can be produced → PPC shifts out." Concave shape shows increasing opportunity cost.
O.2Demand — Movement vs Shift
Movement along D: Only caused by a change in the good's OWN price. Price falls → extension of demand (A→B).
- Shift right (D₂): ↑ income (normal good), ↑ price of substitute, ↓ price of complement, fashion/taste changes favourably
- Shift left (D₀): Opposite of above; inferior good + rising income
Never say "demand rises because price fell" — that is a MOVEMENT. A shift means more/less demanded at EVERY price. Use exact terms: "extension of demand" vs "increase in demand."
O.3Supply — Movement vs Shift
Movement along S: Price rises → extension of supply. Only own price causes movement.
- S₂ (right shift): ↓ costs of production, new technology, subsidy, better weather (agriculture)
- S₀ (left shift): ↑ costs (wages, raw materials), indirect tax imposed, drought, firms leave industry
A tax shifts supply LEFT (adds to costs). A subsidy shifts supply RIGHT (reduces costs). These are the two most frequently tested supply shifters in O Level papers.
O.4Market Equilibrium & Price Changes
E₁: Original equilibrium P* Q*.
D₂ (demand rises): New equilibrium at higher P₂ and Q₂ — demand-pull price increase.
S₂ (supply rises): New equilibrium at lower P₃ — price falls, quantity rises.
D₂ (demand rises): New equilibrium at higher P₂ and Q₂ — demand-pull price increase.
S₂ (supply rises): New equilibrium at lower P₃ — price falls, quantity rises.
4-step method every time: (1) which curve shifts? (2) draw and label shift (3) mark new equilibrium (4) state P and Q direction. This guarantees full marks.
PAPER 1 — ELASTICITY & GOVERNMENT INTERVENTION
O.5Price Elasticity of Demand (PED)
Formula: PED = % change in Qd ÷ % change in P
Elastic (|PED|>1): Large Q response to price change. Many substitutes, luxury, long time period, large % of income.
Inelastic (|PED|<1): Small Q response. Necessities, addictive goods, few substitutes, short time period.
Elastic (|PED|>1): Large Q response to price change. Many substitutes, luxury, long time period, large % of income.
Inelastic (|PED|<1): Small Q response. Necessities, addictive goods, few substitutes, short time period.
TR test: elastic → P and TR move OPPOSITE ways. Inelastic → P and TR move SAME way. Governments tax inelastic goods (fuel, tobacco) to raise large revenue.
O.6Maximum Price (Ceiling) & Minimum Price (Floor)
Maximum price (ceiling): Set BELOW P*. Aims to keep goods affordable. Creates SHORTAGE (Qd > Qs). Examples: rent control, food price caps.
Minimum price (floor): Set ABOVE P*. Aims to protect producers/workers. Creates SURPLUS (Qs > Qd). Examples: minimum wage, EU farm price supports.
Minimum price (floor): Set ABOVE P*. Aims to protect producers/workers. Creates SURPLUS (Qs > Qd). Examples: minimum wage, EU farm price supports.
Ceiling must be BELOW P* to be effective. Floor must be ABOVE P* to be effective. If drawn the wrong way, neither has any effect — the market just stays at P*.
O.7Negative Externality (Market Failure)
Negative externality of production (e.g. factory pollution): External costs imposed on third parties. MSC > MPC.
- Market produces Qm (ignores external costs) — too much output
- Social optimum is Q* where MSC = MSB — less output
- Welfare loss triangle = cost of over-production
- Solutions: Pigouvian tax, regulation/legislation, tradeable permits, education
Label all 3 curves: D=MPB=MSB, MPC (S), MSC. Mark both Qm and Q*. Shade the welfare loss triangle. State: "Market OVER-produces by Qm-Q* relative to social optimum."
O.8Monopoly — Higher Price, Lower Output
Monopoly sets MC=MR → Qm. Price read from AR curve → Pm (higher than competitive Pc). Output Qm < competitive Qc.
- Pm > Pc — consumers pay more
- Qm < Qc — less produced
- DWL triangle: welfare lost due to under-production
- Supernormal profit can persist (barriers to entry)
- BUT: economies of scale possible; R&D funded by profits
For any monopoly question: draw MC=MR for Qm, then go UP to AR for Pm. The DWL triangle is between Qm, Qc and the MC/AR curves. Always evaluate both negative AND positive aspects of monopoly.
PAPER 2 — MACROECONOMICS
O.9AD/AS Model — Policy Effects
AD shifts right (E₁→E₂): Government ↑G, ↓taxes, or central bank ↓interest rates. Real GDP rises, price level rises, unemployment falls.
AS shifts right (E₁→E₃): Supply-side policies, ↓costs. Real GDP rises but price level FALLS — best outcome.
AS shifts right (E₁→E₃): Supply-side policies, ↓costs. Real GDP rises but price level FALLS — best outcome.
AD=C+I+G+(X−M). Know what shifts each component. Fiscal policy affects G and T. Monetary policy affects interest rates → affects C and I. Supply-side policies affect AS.
O.10Minimum Wage in the Labour Market
Minimum wage: Legal floor set ABOVE W*. Creates unemployment = Ns − Nd.
- Firms demand fewer workers (Nd) — labour more expensive
- More workers supply labour (Ns) — attracted by higher wage
- Benefits: Higher income, reduces in-work poverty, incentivises work
- Problems: Unemployment, firms may cut hours, higher costs → prices rise
Always draw W_min ABOVE W*. Always evaluate BOTH advantages and disadvantages of minimum wage — it is almost always a 4-mark or 6-mark evaluation question at O Level.
O.11Exchange Rate — Appreciation & Depreciation
Appreciation (ER rises — E₁→E₂): Demand for currency rises (↑exports, ↑interest rates, ↑FDI). Effect: imports cheaper (helps inflation), exports dearer (hurts exporters, BoP worsens).
Depreciation (ER falls — E₁→E₀): Demand for currency falls. Effect: exports cheaper (↑exports), imports dearer (↑inflation, costs rise).
Depreciation (ER falls — E₁→E₀): Demand for currency falls. Effect: exports cheaper (↑exports), imports dearer (↑inflation, costs rise).
Chain of reasoning: "Interest rates rise → hot money flows in → demand for currency rises → currency appreciates → exports more expensive → quantity of exports falls → current account worsens." Link every step.
O.12Effect of a Tariff (Trade Protection)
Without tariff: World price Pw → large imports (Qd₁ − Qs₁).
With tariff: Price rises to Pw+t → domestic supply rises to Qs₂, demand falls to Qd₂. Imports fall. Government earns tariff revenue (gold box).
With tariff: Price rises to Pw+t → domestic supply rises to Qs₂, demand falls to Qd₂. Imports fall. Government earns tariff revenue (gold box).
- Domestic producers protected (higher price, sell more)
- Consumers pay more — welfare falls
- May invite retaliation from trading partners
Arguments FOR protection: infant industry, strategic industry, prevent dumping, save jobs, improve BoP. Arguments AGAINST: higher prices for consumers, inefficiency, retaliation, hinders LDC development. Always give both sides.