Unit cost of production

(Total Cost/ Output) £

Short-run average cost curve 1

SACC 2
SACC 4

Short-run average cost

curve 3
Long-run average cost curve (red
envelope curve of SACC curves)

Economies of scale Diseconomies of scale

Minimum efficient scale Scale of production
Tendency for ‘natural monopoly’ if the ‘minimum efficient scale’ (MES) of production is
only achieved with a large share of the total market, and operators incur a significant
cost disadvantage by operating below the minimum efficient scale of production.
Unit cost of production
(Total Cost/ Output) £

Long-run average
cost curve

Short-run average
Short-run average SACC 4 cost curve 1
cost curve 3

SACC 4

Diseconomies of scale

Minimum efficient scale Scale of production

 Innovation Waves

Internet and
Electricity, fibre optics
Electronics
Steel, chemicals (1980
and aviation
steam and the
(1930 – onwards)
power and internal
1980)
Water power, railways combustion
textiles and iron (1830 – engine
(1780 – 1830). 1880). (1880-1930)

1780 1850 1900 1950 1990 Time

Economic
activity

Recovery Prosperity Recession Depression

Time
50 Years
 Economic
Growth (GDP)

Recovery
Prosperity Downturn
Zero
growth Recession Time
Recession

Negative
economic growth
Business Cycle (often around 7 years)
Bank agrees loan with borrower

Assets Liabilities

Loan Account payable

£10 £10
 Money Money
Money Supply Supply 2
demand

Quantitative
Interest rate (%)

easing
ir

ir2

Quantity of Money
Bank’s accounting treatment when paying loan

Assets Liabilities

Loan £10 Account payable £0

becomes a
Client deposit £10
Accounting treatment of process

Assets Liabilities

Loan $3 Account payable

billion becomes a
Client deposit
becomes
New share capital $3
billion
 Assets Liabilities

• Loans to customers • Customer deposits

• Debt
• Reserves at the central bank • Bank capital - comprises of:
• initial shareholder equity
• Cash investment at the Initial Public
Offering (IPO)
• Physical assets • additional equity issued over
(for example, buildings and time, and after the IPO.
equipment) • retained profits
• subordinated debt
• Financial assets
(for example, government
and corporate bonds). Please note: Bank capital is reduced
by provisions that are made to cover
depreciation of assets, and provisions
for bad and doubtful debts of
customers.
 QE impact on the pension fund balance sheet

Assets Liabilities

Less: Sale of Treasury Stock

leads to loss of asset on the
balance sheet Unchanged
(£100)
Add: Bank deposit from sale
+£100
QE impact on the commercial bank balance sheet

Assets Liabilities

Central Bank Reserves Deposit Pension fund

£100 £100
 Reduce existing
debt servicing
costs.

Increase
affordability of
new borrowing.

Lower official Lower market Rising asset Rising domestic

interest rate interest rates prices demand

Change in
expectations / Increase in
confidence total demand

Lower Rising external

exchange rate demand
 Wheat Market
Market Price
(£)
Farm A Farm B
Demand Supply Marginal Cost
Marginal Cost
Average
Cost
Average
Cost

A B
P
D C

Quantity Quantity Quantity

P is the equilibrium price, within the wheat market = Average Revenue = Marginal Revenue .

Both firms A and B encounter the same revenue conditions.

Profit £

Minimum profit constraint

Profit

Profit maximiser’s output Sales maximiser’s output Sales

 Supply – Growth Demand – Growth
Relationship Relationship
Profit (£) Profit (£) Profit (£)

Distributed
earnings
Project
profitability
initially Project
rises profitability
Retained
earnings then falls

Growth (%) Growth (%) Growth (%)

Optimum
Growth Rate
£5 Demand curve

£4
Price of beer (£)

£3

£2

£1

0
Quantity (pints of beer)

10 20 30 40 50 60 70
0
 Consumer’s budget is £100 per week
Price of bread is £1 per loaf
Price of beer is £2 per pint

50
Budget Line (budget constraint) presents
Quantity (Pints) of Beer

all product bundle combinations that a

consumer can purchase with their budget:
• 100 loaves of bread (budget of £100/1)
• 50 pints of beer (budget of £100 / 2)

0
Quantity of Bread

100
0
 Doubling the consumer’s budget from
£100 per week to £200 per week will
double the quantity of loaves and beer that
can be purchased with the available
100 budget.
This assumes that the price of the
Quantity (Pints) of Beer

products remains unchanged:

• Price of bread is £1 per loaf
• Price of beer is £2 per pint

50 Budget Line 2

Budget Line 1

0
Quantity of Bread

100 200
0
 Halving the consumer’s budget from £200
per week to £100 per week will halve the
quantity of loaves and beer that can be
purchased with the available budget.
100
This assumes that the price of the
Quantity (Pints) of Beer

products remains unchanged:

• Price of bread is £1 per loaf
• Price of beer is £2 per pint

50
Budget Line 1

Budget Line 2

0
Quantity of Bread

100 200
0
 Consequence of doubling the consumer’s
100 budget from £100 per week to £200 per
week.
Quantity (Pints) of Beer

Indifference Curve 2
50

Budget Line 2

Budget Line 1 Indifference Curve 1

0
Quantity of Bread

100 200
0
100
Quantity (Pints) of Beer

50
Budget Line 1

Budget Line 2

0
Quantity of Bread

100 200
0
 Doubling the price of beer from £2 per pint to £4
per pint for a consumer earning £200 per week,
will reduce beer consumption from 65 pints to 30
Quantity (Pints) of beer consumed

pints per week, and increase consumption of

100 bread from 70 to 80 loaves per week.

((65 x £2) = £130) + ((70 x £1) = £70) = £200

65 ((30 x £4)= £120) + ((80 x £1) = £80) = £200

50
Budget Line 1
30
Budget Line 2

0
Quantity of bread consumed

70 80 100 200
0
 Substitution effect

Indifference curve 1
Quantity (Pints) of beer consumed

100 Budget Line 1 Initial Optimum

65 New optimum
58
50
Budget line 2 – parallel shift
30

Budget Line (2)

0
Quantity of bread consumed

55 70 80 100 200
0
 Substitution effect
Income Effect
Indifference curve 1
Quantity (Pints) of beer consumed

100 Budget Line 1 Initial Optimum

65 New optimum
58
50
Budget line 2 – parallel shift
30

Budget Line (2)

0
Quantity of bread consumed

55 70 80 100 200
0
 Substitution effect
Income Effect
Indifference curve 1
Quantity (Pints) of beer consumed

100 Budget Line 1 Initial Optimum

A Substitution effect
65 B New optimum
58
50
Income Effect
C Budget line 2 – parallel shift
30

Budget Line (2)

0
Quantity of bread consumed

55 70 80 100 200
0
100
Quantity (Pints) of Beer

Optimum

50

Budget Line

0
Quantity of Bread

100 200
0
50
Quantity (Pints) of Beer

Indifference
Curve 1

0
Quantity of Bread

100
0
 Marginal Rate of Substitution is different
at each point on the Indifference Curve.
50
∆Y Marginal Rate of Substitution
Quantity (Pints) of Beer

∆X

∆Y
∆X Indifference
Marginal Rate of Substitution Curve 1

0
Quantity of Bread

100
0
50
Quantity (Pints) of Beer

Indifference
Curve 2

Indifference
Curve 1

0
Quantity of Bread

100
0
 Indifference Point C is preferable to point A. This is indicated by the
Curve 2 consumer acquiring more of both beer and bread at
point C, relative to point A. However, the indifference
curves suggest the consumer is indifferent between
product bundles A and B, and also product bundles B
and C.
50 C It cannot be the case that an indifference curve is at
some points preferable to another indifference curve,
Quantity (Pints) of Beer

and at other points equally desirable (or inferior) to the

other indifference curve.
A
This situation contravenes the axiom of transitivity.

Indifference
Curve 1

0
Quantity of Bread

100
0
 Long-run Average Cost

Long-run Marginal Cost

P1 Average Revenue
Monopoly makes
super-normal profit
Price / Unit Cost (pence)

despite inefficient MC = MR
production

Lowest point of AC curve

AC1

AC
Firm is loss-making when producing a level of output that is
P allocatively and productively efficient

Marginal Revenue
Quantity

Super-normal profit making monopoly output Whole Market Output

Q1 Q
 Long-run Average Cost

Long-run Marginal Cost

Average Revenue
Price / Unit Cost (pence)

Lowest point of AC curve

AC
Firm is loss-making when producing a level of output that is
P allocatively and productively efficient

Marginal Revenue
Quantity

Whole Market Output

Q
 Long-run Average Cost

Long-run Marginal Cost

P1 Average Revenue
Monopoly makes
super-normal profit
Price / Unit Cost (pence)

despite inefficient MC = MR
production

Lowest point of AC curve

AC1

AC
Firm is loss-making when producing a level of output that is
P allocatively and productively efficient

Marginal Revenue
Quantity

Super-normal profit making monopoly output Whole Market Output

Q1 Q
 Long-run Average Cost

Long-run Marginal Cost

P1
Monopoly makes Average Revenue
super-normal profit
Price / Unit Cost (pence)

despite inefficient MC = MR
production

Lowest point of AC curve

Price = MC
AC1

P=
Nationalised firm is earning normal profits when producing a level
AC
of output that is allocatively and productively efficient

Marginal Revenue
Quantity

Super-normal profit making monopoly output Whole Market Output

Q1 Q
 Whole Market Price (£)
Price Individual Firm - Equilibrium
(£)
Demand Supply Average
Marginal Cost
Cost

Equilibrium
MR=AR
Price

Equilibrium Quantity Output Quantity

Quantity demanded and supplied
 Loss making firm Super-normal Profit Earning Firm

Price (£) Price (£)

Average
cost
Marginal Average
Marginal
Cost Cost
Cost

MR = AR
Loss
MR = AR
MC=MR
Super-normal
MC=MR
profit

Output Output
Exchange Rate
($ / £)

Demand for £’s

Exchange Rate
($ / £)

Supply of £’s
 MC
Price

Each additional
unit produced
Each additional unit
generates
produced generates
greater
greater additional
additional cost
revenue than than additional
additional cost. revenue.

MR
Quantity
Profit maximising output
 MC
Price Each additional
unit produced
generates
greater
MR additional cost
Each additional unit than additional
produced generates revenue.
greater additional
revenue than
additional cost.

Quantity
Profit maximising output
 Cost/
Price (£)
Super normal profit

Marginal Cost

Average
cost
Price
Super-normal
Profit

MC=MR

Cost
Average
Revenue

Output Marginal
Revenue
 Long - Term
Normal profits are earned at the profit
maximising output (MC=MR)
Marginal Cost

Average cost
Price

MC=MR

Average
Marginal
Revenue
Revenue
Output
 Exchange Rate
($ / £) Supply of £’s
Demand for £’s
More
Dollars –
£ Stronger At the equilibrium
Equilibrium exchange rate, currency
Exchange supply equals demand.
Rate ($ / £)

Fewer
Dollars –
£ Weaker

Demand and Supply of £’s

 Price (£)

Welfare loss to society.

Marginal Cost Consequence of allocative
inefficiency, due to monopoly output
being lower than perfect competition
output. Where lost units generate a
Monopoly greater value of satisfaction to
Price consumers than it costs the
Price in monopolist to produce. Ceteris
perfect paribus.
competition
Price = MC (perfect competition)
MC=MR (monopoly)
Average
Marginal Revenue
Revenue
Monopoly Perfect
output competition
output
 Price (£) Transfer. Monopoly producer
acquires some of the consumer surplus

Marginal Cost

Monopoly Price
Price in perfect
competition

Price = MC (perfect competition)

MC=MR (monopoly)
Average
Marginal Revenue
Revenue
Monopoly Perfect
output competition
output
 Price (£)

Marginal Cost
(perfect competition)
Marginal Cost
(monopoly)
Monopoly
Price Lower costs of monopolist
Price in may enable the monopolist to
perfect produce the same output as a
competition perfectly competitive industry,
and charge the same price.

Average
Marginal Revenue
Revenue
Output is the same in both
monopoly and perfect competition.
Normal Market Demand Curve Oligopoly Firm Demand Curve –
Kinked Demand Curve

Firm expects that price increase would not

be replicated by other companies, causing
company raising prices to suffer a
considerable reduction in sales.
Current Market
Price

Firm expects price reduction may lead to ‘price

war’, preventing firm increasing sales and also
reducing industry profitability.
 Price
Marginal Cost 2

Marginal Cost 1
Price

Marginal cost can vary between MC1

and MC2 without affecting price
within the oligopoly market, due to
oligopoly being uncertain how their
competitors would respond to a
price change.
Marginal Average
revenue revenue

Output
 Super-normal profit
Price

Marginal Cost

Average Cost
Price
Profit

MC cuts the lowest point of

the AC curve
Costs

Marginal Average
revenue revenue

Output
Price

Firm’s Demand Curve

Price = MR = AR

MR = Marginal Revenue
AR = Average Revenue

Quantity
Price

Demand

Quantity
Price

Demand
Price

Demand
Price

Demand
Price

Quantity Supplied
Price

Quantity Supplied
Price

Quantity Supplied
Price
S
S1

Quantity Supplied
Price
S1
S

Quantity Supplied
Price D1

Q Q1 Quantity Demanded
 Marginal Social Cost (MSC)
Price
Marginal Social Benefit (MSB)
Marginal Private Benefit (MPB)

Marginal Private
Cost (MPC)

SQ2 PQ 1
Quantity Demanded and Supplied
 Marginal Social Cost (MSC)

Marginal Social Benefit (MSB)

Marginal Private Benefit (MPB)
Price

Dead weight Marginal Private

social Cost (MPC)
welfare loss

SQ2 PQ 1
Quantity Demanded and Supplied
Price
Marginal Social Benefit (MSB)
Marginal Private Benefit (MPB)

Marginal Social
Cost (MSC)
Dead weight social Marginal Private
welfare loss Cost (MPC)

SQ2 PQ 1
Quantity Demanded and Supplied
 Marginal Private Cost (MPC)
Price
Marginal Private Benefit (MPB)
Marginal Social Benefit (MSB)

Marginal Social
Cost (MSC)

PQ 1 SQ2
Quantity Demanded and Supplied
 Marginal Private Cost (MPC)
Price
Marginal Private Benefit (MPB)
Marginal Social Benefit (MSB)

Marginal Social
Cost (MSC)

Potential social
welfare gain

PQ 1 SQ2
Quantity Demanded and Supplied
Marginal Private Benefit (MPB)
Marginal Social Benefit (MSB)

Marginal Private Cost (MPC)

Price
Marginal Social
Cost (MSC)

Potential social
welfare gain

PQ 1 SQ2
Quantity Demanded and Supplied
Price D

D1

Q1 Q Quantity Demanded
Price
Inelastic

Demand
Price

Elastic

Demand
 Business A Business B Market = All businesses.
Business A + B
Price Price Price

Supply Curve A Supply Curve B

Supply Curve A+B

Quantity Supplied Quantity Supplied Quantity Supplied

Income (£)
Inferior good – Rising incomes
reduce the quantity demanded.

Income elasticity is zero –

demand is unaffected by
income changes.

Income elasticity is initially

positive – demand rises with
income – Normal good.
Demand
 Wage rate (£)
SL
DL Excess
supply
(surplus)
W1. Market wage
rate (above market
clearing wage rate)

W0. Market
clearing wage
rate

QD QS Demand and
Supply of Labour
 Price
S
D

Consumer
Equilibrium price Surplus
Producer
Surplus

Equilibrium Quantity demanded

quantity and supplied
 Price
S
D

Consumer
Equilibrium price Surplus

Equilibrium Quantity demanded

quantity and supplied
 Price
S
D

Consumer
Equilibrium price Surplus

Total
Consumer
Payments
(Price x
quantity)

Equilibrium Quantity demanded

quantity and supplied
 Price
S
D

Equilibrium price
Producer
Surplus

Transfer
Earnings

Equilibrium Quantity demanded

quantity and supplied
 Price
S
D

Equilibrium price
Economic
Rent /
Producer
Surplus

Equilibrium Quantity demanded

quantity and supplied
 Price
S
D

Equilibrium price

Transfer
Earnings

Equilibrium Quantity demanded

quantity and supplied
 Price (£)
S = MC
D = MU

Consumer
Equilibrium Price Surplus (A)
Producer
Surplus
(B)

Transfer
Earnings
(C)
Equilibrium Quantity demanded and
quantity supplied
Price (£)

D
Slong-run
P5
P3
P1

Pe

P2
P4
Quantity Demanded
and Supplied
QS5 QS3QS1 QE QS2 QS4

Qs = Short – run supply curves

 Price (£)

Slong-run

D
P1

P3
Pe
P2

QS1 QEQS3 QS2

Quantity Demanded
and Supplied

Qs = Short – run supply curves

Total Cost and
Total Revenue Total Cost

Zone of profit
Total
Revenue

Output
Maximum
profit
 Supply - Growth Demand - Growth
Profit (£) Profit (£) Profit (£)

Project
profitability
Project
initially
profitability
rises
then falls

growth rate
Optimum
Growth (%) Growth (%) Growth (%)
 Work – Leisure Trade-off
Weekly Wage / Consumption (£)

£810

£540 Budget Line 2

Budget Line 1

0
Hours of Leisure
90
0
 Weekly wage / consumption (£)

£810 Budget Line 2

£540

Budget Line 1
IC1

0
Hours of leisure
0 28 40 90
 Work – Leisure Trade-off
Higher wage reduces leisure time from 40
Weekly wage / consumption (£) hours to 34 hours.

Working hours rise from 50 hours per

week to 56 hours per week.

£810 Budget Line 2

£540

Budget Line 1 IC2

IC1

0
Hours of leisure
0 28 40 90
34
 Weekly wage / consumption (£)

£810 Budget Line 2

£540

Budget Line 1 IC2

IC1

0
Hours of leisure
0 28 40 90
34
 0
£6
£9
Hourly Wage / Consumption (£)

0
Hours of Work
 Hourly Wage / Consumption (£)
Labour supply curve

£9

£6

0
Hours of Work

0
= Income

Flow of factor payments (wages, dividends, interest

and rent).
Flow of factors of production (land, labour,
capital and enterprise)
Households
= Output

Firms

Flow of Goods and services.

Expenditure

Consumer expenditure on goods and services

Real economy

Money
Real economy

Firms
Flow of
Goods and
services

Flow of factors of
production (land,
labour, capital and
enterprise)

Households
Injections into Withdrawals
Circular Flow from Circular
Firms Flow

Consumer expenditure on goods and services

Saving

Flow of Goods and services.

Flow of factors of production

Investment

Flow of factor payments

Government Taxation
spending

Exports Imports

Households
 Financial Markets

Foreign Exchange Market

Exports (£s from foreign

Government

exchange market)
Imports (£s to foreign

Investment
exchange market)

Taxation
Saving

Balanced Budget

Classical view - Exchange rate (price of £ sterling)

equates supply and demand for £ Sterling

Classical view - Interest rate (price of borrowing, and income from deferred
consumption) in financial market equates saving and investment
Consumer
Expenditure (£)
C = a + bY Consumption

Income derived
b consumer expenditure

}a Y = National Income
Autonomous consumer expenditure

Real Income (Real GDP) [£]

 C = a + bY
Consumer expenditure
Consumer Expenditure (£)

Income derived
b consumer expenditure

}a Y = National Income
Autonomous consumer expenditure

Real Income (Real GDP) [£]

 45 degree line:
Expenditure = Income

Aggregate Expenditure =
C + I + G + (X – M)
Expenditure (£)

Expenditure = Income (45 degree line)

Real Income (Real GDP) [£]

 45 degree line:
Expenditure (Cdp + injections) = Income
Expenditure, withdrawals and injections (£) produced in the economy (Cdp + withdrawals)

Aggregate Expenditure =
Cdp + injections

Expenditure = Income (45 degree line)

Real Income (real GDP) [£]

 45 degree line:
Expenditure (Cdp + injections) = Income
produced in the economy (Cdp + withdrawals)
Expenditure, withdrawals and injections (£)

£1 million

Expenditure = Income (45 degree line)

£1 million Real Income (Real

GDP) [£]
 45 degree line: Expenditure = Income
Expenditure, withdrawals and injections (£)

£1 million

Expenditure = Income (45 degree line)

£1 million Real Income (Real

GDP) [£]
 Keynesian 45 degree Diagram
Expenditure, withdrawals and injections (£)

Aggregate Expenditure Aggregate Demand Curve

Price Level
Expenditure = Income (45
degree line)

Aggregate Demand
Aggregate
(downward sloping)
Expenditure
(upward sloping)

Real Income (real GDP) [£] Real Income (real GDP) [£]
 45 degree line

Aggregate Expenditure
Expenditure, withdrawals and injections (£)

Expenditure = Income (45 degree line)

Real Income (real GDP) [£]

Withdrawals = S + M + T

Injections = I + X + G

Real Income (real GDP) [£]

 45 degree line: Expenditure = Income

C+I+G+(X-M)
C+I+
Government
Spending
C+ Investment
Consumer
Expenditure (£)

expenditure

Expenditure = Income (45 degree line)

Real Income (real GDP) [£]

 45 degree line: Expenditure (Cdp + injections) = Income
generated in the economy (Cdp + withdrawals)
Cdp+I+G+X

Cdp + I +
Expenditure, withdrawals and injections (£)

Government
Spending
Cdp+ Investment

Consumer expenditure on
domestically produced products (Cdp)

Expenditure = Income (45 degree line)

Real Income (real GDP) [£]

 AE 2

Expenditure, withdrawals and injections (£)

AE2 - Inflationary gap
} AE 0 (Equilibrium)

} Deflationary gap
AE 1

Output (recessionary)
Gap

Expenditure = Income (45 degree line)

Real Income (real GDP) [£] Y deflation Y optimal Y inflation

 AD 1
(Equilibrium)

} Deflationary gap
AD 0
Expenditure (£)

Output Gap

Expenditure = Income (45 degree line)

Y (equilibrium) Y full Real Income

deflation employment (real GDP) [£]
 AD 0

AD 1 (Equilibrium)
Expenditure (£)

} Inflationary gap

Expenditure = Income (45 degree line)

Y full employment Real Income
(real GDP) [£]
 Aggregate Supply Curve
Price Level

Aggregate
Demand 2

Initial Aggregate Demand

Real Income Y1 – Unemployed Y2 - Full employment

(real GDP) [£] Resources level of national income
 Aggregate Supply Curve
Aggregate Demand 3
Price Level

Aggregate
Demand 2

P3

P2

Real Income (real GDP) [£] Y2 - Full employment

level of national income
 Percentage change in
money wages

W%

X%
Full employment 2.5% Rate of unemployment (%)
Price Level

P1

Rising price level

below full
employment is
caused by
Aggregate Supply Curve bottlenecks
P0 developing within
economy.

Y0 Y1 - Full employment
Real Income (real GDP) [£]
level of national income
Price Level

P1

Aggregate Supply Curve

P0

Y0 Y1 - Full employment
Real Income (real GDP) [£]
level of national income
Price Level

P2

P1
Aggregate Supply Curve 2

Aggregate Supply Curve

Y2 Y1 Full employment
Real Income (real GDP) [£]
level of national income
 Long-run aggregate supply curve

Price Level

Real Output (real GDP) [£]

 Long-run aggregate Long-run aggregate
supply curve supply curve 2
Price Level

Real Output (real GDP) [£]

 Long-run aggregate Long-run aggregate
supply curve 2 supply curve

Price Level

Real Output (real GDP) [£]

 Aggregate supply curve

Price Level

Real Output (real GDP) [£]

Y Unemployed Y1 Full employment

Resources
 Aggregate supply curve

P2
Price Level

Real Output (real GDP) [£]

Y1 Full employment
 Short-run aggregate supply curve
Price Level

Real Output (real GDP) [£]

Price Aggregate
Level Demand1

Aggregate
Demand

level of national income

Yf = Full employment
P3
P2

P1
Aggregate Supply1
Aggregate Supply

Real Income (real GDP) [£] Y Y2 Y1 Yf

Price Level

P4 4

P3 3

P2 2

P1 1
Aggregate Supply Curve 3 Aggregate Supply Curve 2

Aggregate Supply Curve

Y2 Y1 Full employment
Real Income (real GDP) [£] level of national income
Percentage
change in Inflationary expectations = 5%
money wages
Natural Rate of Unemployment (NARU)
Inflationary Or/
expectations = 0
Non-Accelerating Inflation Rate of
Unemployment (NAIRU)

5% 2 3

1 4

2.5% Rate of unemployment (%)

 Precautionary
demand (P)
Rate of Transactions
Interest demand (T) Liquidity Preference
Schedule (P + T + S)

Speculative
demand (S)

Quantity of Money
 Rate of Interest Money Supply

Interest
rate

Demand for Money -

Liquidity Preference
Schedule (T +P + S)

Quantity of Money
 Rate of Interest Money Money
Liquidity Preference Supply Supply 2
Schedule (P + T + S) –
Monetarist perspective

Interest
rate

Interest
rate 2

Quantity of Money
 Rate of Interest

Interest
rate 0

Marginal efficiency of
investment (MEI) curve

Interest
rate 2

Investment expenditure 0 Investment expenditure 2

Desired investment expenditure
 Rate of Interest Money Money
Supply Supply 2

Liquidity Preference
Schedule (P + T + S) –
Keynesian perspective

Interest
rate
Interest
rate 2

Quantity of Money
 Rate of Interest

Marginal efficiency of
investment (MEI) curve

Interest
rate
Interest
rate 2

Desired investment expenditure

 Wage

£400

Average money holding

during the month is £200.

Week 1 Week 2 Week 3 Week 4 Time

 Wage

£100

Average money
holding during
£50
the month is £50.

Week 1 Week 2 Week 3 Week 4 Time

Interest rate

One year Two year Three Four Bond – Years

year year to maturity
Government
Budget Position

Taxation

Budget Surplus Government

expenditure
Budget Deficit

GDP
Y2 Y1 Y3
Government
Budget Position

Taxation

Budget Surplus
Budget Deficit Government expenditure 1
Government expenditure

GDP
Y2 Y1 Y3
 Net Exports (Exports – Imports)
Nation ultimately acquires the
Trade
benefits of a currency depreciation
Surplus

Policy initiative to
depreciate currency.

Trade Surplus
Time
Trade
T1 Deficit T2 T3

Trade
Deficit

Trade deficit initially becomes

worse, before getting better
Personal
Income Tax £
Regressive
taxation
Progressive
taxation

Personal Income £
 100%
Cumulative Income Share (%)

80%

60%

40%

20%

20% 40% 60% 80% 100%

Cumulative Population Share (%)

 Whole Market Individual Firm – Equilibrium
Perfectly competitive firm is a wage taker
Wage (£) Price (£)
Demand Supply of
for labour labour Demand for labour = Marginal
revenue product of labour

Equilibrium Wage rate

Wage

Equilibrium Quantity Quantity Quantity

Quantity demanded and supplied
 Whole Market Individual Firm – Equilibrium
Perfectly competitive firm is a wage taker
Price (£) Price (£)
Demand Supply of
for labour labour Demand for labour = Marginal
Supply of revenue product of labour
labour 2

Wage rate 1
W0

Wage rate 2
W1

Equilibrium Quantity Q1 Q2 Quantity

Quantity demanded and supplied
Government tax revenue (£)

Marginal Tax Rate (%)

Percentage Inflationary
change in expectations = 5%
money wages Natural Rate of Unemployment
Inflationary (NARU)
expectations = 0 Non-Accelerating Inflation Rate of
Unemployment (NAIRU)

5%

2.5% Rate of unemployment (%)

 Firm infrastructure
Support Activities

Human Resource Management

Technology Development

Procurement

Outbound Logistics
Inbound Logistics

Marketing and

Service
Operations

Sales

Primary activities (end-to-end process)

Philanthropy Area for Potential
Corporate Shared Value
• Improve the external social context in
ways that are beneficial for both the company
and society.
Social benefit

• Redesign value chain activities to reduce negative

externalities, and promote positive externalities.

• Redesign product propositions and redevelop markets

to reduce social need and increase social benefit.

Pure commercial
benefit
Economic benefit
 Backward (Upstream) Vertical Integration
Raw Material Component Financier / Machine
Logistics
Supplier Supplier credit provider manufacturer

Backward
Vertical
Horizontal
By-product Competitor
Manufacturer
Forward
Integration
Vertical

Retail outlets/ Repairs and Customer Customer

Logistics
wholesalers servicing support finance

Forward (Downstream) Vertical Integration

Economist’s Production Chain is
the same as Porter’s Value System

Farm (source of raw materials).

Economists refer to this type of activity
occurring within the primary sector.

Factory (manufacturing and

processing). Economists refer to this
type of activity occurring within the
secondary sector.

Shop (services and retailing).

Economists refer to this type of activity
being within the tertiary sector
 Value System
Supplier A Supplier B Supplier C

Organisation’s Value Chain

A Distribution B Distribution C Distribution

Channel Value Chain Channel Value Chain Channel Value Chain

A Customer Value B Customer Value A Customer Value

Chain Chain Chain
 Price UK Supply
European Supply

Welfare gain from Britain

P UK
entering European Union
– Trade Creation effect.
P Euro
UK Welfare gain from
free world trade, rather
than just free European
trade – Trade Diversion.

P world World Supply

UK Demand

Quantity
Q UK Q UK Q
UK Euro World
Lender and borrower agree a loan Bank pays the agreed loan

Assets Liabilities Assets Liabilities

Account payable
Loan Account payable Loan
£0
£100 £100 £100 Client deposit
£100
 Percentage change in quantity demanded
Percentage change in price

Change in Price
Initial Price
= Change in Quantity * Initial Price =
Initial Quantity Change in price

Change in quantity demanded

Initial Demand

Change in Demand =
Elasticity of labour supply = Percentage change in quantity of labour supplied
Percentage change in wage rate
 Percentage change in quantity of labour demanded
Elasticity of demand for Labour =
Percentage change in wage rate
 Rearranging the optimum equation (shown above) will give:

MRS =

Optimum occurs where:

Optimum occurs where the Marginal Rate of Substitution (MRS) equals the ratio of prices =