Session 1 (Source: Sloman, J.

2006, Economics, FT Pearson,

Harlow) Chapter 1
Learning Objectives
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 A production possibility curve
8

6
Units of food (millions)

5 Units of food Units of clothing

(millions) (millions)

4 8m 0.0
7m 2.2m
3 6m 4.0m
5m 5.0m
4m 5.6m
2 3m 6.0m
2m 6.4m
1m 6.7m
1
0 7.0m

0
0 1 2 3 4 5 6 7 8
Units of clothing (millions)
 A production possibility curve
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a
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Units of food (millions)

5 Units of food Units of clothing

(millions) (millions)

4 a 8m 0.0
7m 2.2m
3 6m 4.0m
5m 5.0m
4m 5.6m
2 3m 6.0m
2m 6.4m
1m 6.7m
1
0 7.0m

0
0 1 2 3 4 5 6 7 8
Units of clothing (millions)
 A production possibility curve
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b
7

6
Units of food (millions)

5 Units of food Units of clothing

(millions) (millions)

4 8m 0.0
b 7m 2.2m
3 6m 4.0m
5m 5.0m
4m 5.6m
2 3m 6.0m
2m 6.4m
1m 6.7m
1
0 7.0m

0
0 1 2 3 4 5 6 7 8
Units of clothing (millions)
 A production possibility curve
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c
6
Units of food (millions)

5 Units of food Units of clothing

(millions) (millions)

4 8m 0.0
7m 2.2m
3 c 6m 4.0m
5m 5.0m
4m 5.6m
2 3m 6.0m
2m 6.4m
1m 6.7m
1
0 7.0m

0
0 1 2 3 4 5 6 7 8
Units of clothing (millions)
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 8 Increasing opportunity costs
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x
6
Units of food (millions)

1 y
5
1
4

0
0 1 2 3 4 5 6 7 8
Units of clothing (millions)
 8 Increasing opportunity costs
7

x
6
Units of food (millions)

1 y
5
1
4 2

3
z
1

0
0 1 2 3 4 5 6 7 8
Units of clothing (millions)
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 Making a fuller use of resources

x
Production inside
Food

the production y
possibility curve

O
Clothing
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 Growth in potential output
Food

Now

O
Clothing
 Growth in potential output

5 years’ time
Food

Now

O
Clothing
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 (1) (2) (3) (4)
Price Tracey's Darren's Total market
(pence per kg) demand demand demand
(kg) (kg) (tonnes: 000s)

A 20 28 16 700
B 40 15 11 500
C 60 5 9 350
D 80 1 7 200
E 100 0 6 100
 Market demand for potatoes (monthly)
E Point Price Market demand
100 (pence per kg) (tonnes 000s)
A 20 700
D 40
80 B 500
Price (pence per kg)

C 60 350
C D 80 200
60 E 100 100

B
40

A
20
Demand

0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
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 An increase in demand

P
Price

D0 D1

O Q0 Q1
Quantity
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 P ric e o f F a rm e r X 's T o ta l M a rk e t
p o ta to e s s u p p ly s u p p ly
(p e n ce p er k g ) (to n n es ) (to n n es : 00 0s )

a 20 50 100

b 40 70 200

c 60 100 350

d 80 120 530

e 100 130 700

 Market supply of potatoes (monthly)
100 e
Supply
d P Q
80
a 20 100
b 40 200
Price (pence per kg)

c c 60 350
60
d 80 530
e 100 700
b
40

a
20

0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
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 Changes in prices of goods
in competitive supply
• Goods in competitive
supply – 2 goods to be
produced are competing for
the same resources.
Changes in prices of goods in
joint supply
•Goods in joint supply –
when one good is produced,
another good is produced at
the same time.
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S1
Price Price S
S

P1 P

P0

Q0 Q1 Quantity Q1 Q0 Quantity
Beef Milk
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Price S
Price S1
S

P
P1

P0

Q0 Q1 Quantity Q0 Q1 Quantity
Petrol Diesel
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 Shifts in the supply curve
P
S2 S0 S1

Decrease Increase

O Q
Price of Potatoes Total Market Demand Total Market Supply
(pence per kilo) (Tonnes: 000s) (Tonnes: 000s)

20 700 (A) 100 (a)

40 500 (B) 200 (b)
60 350 (C) 350 (c)
80 200 (D) 530 (d)
100 100 (E) 700 (e)
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 E e
100
Supply
D d
80
Price (pence per kg)

Cc
60

b B
40

a A
20

Demand
0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
 E e
100
Supply
D d
80
Price (pence per kg)

Cc
60

b SHORTAGE B
40
(300 000)
a A
20

Demand
0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
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 E e
100
Supply
D SURPLUS d
80
(330 000)
Price (pence per kg)

Cc
60

b B
40

a A
20

Demand
0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
 E e
100
Supply
D d
80
Price (pence per kg)

60

b B
40

a A
20

Demand
0
0 100 200 300 Qe 400 500 600 700 800
Quantity (tonnes: 000s)
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 P
S

Initial equilibrium at
point g
g
Pe1

D1
O Qe1 Q
 P
S

g
Pe1

D1
O Qe1 Q
 P
S

g
Pe1

D2

D1
O Qe1 Q
 P
S

i New equilibrium at
Pe2 point i

g h
Pe1

D2

D1
O Qe1 Qe2 Q
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 P

S1

g Initial equilibrium at
Pe1 point g

D
O Qe1 Q
 P

S1

g
Pe1

D
O Qe1 Q
 P
S2

S1

g
Pe1

D
O Qe1 Q
 P
S2

S1

k
Pe3

j g New equilibrium at
Pe1 point k

D
O Qe3 Qe1 Q
 Price Price Price
S1
S1 D2 S1
S2 S2
P2 D1 S2 P1
P1 P1 P2
D2
D2
D1
D1
Q1 Q2 Q1 Q2 Q1 Q2

Quantity Quantity Quantity

 Effect on
Increase in Equilibrium Equilibrium
demand with Price Quantity
Increase in Indeterminate Increase
Supply
Decrease in Increase Indeterminate
Supply
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Units of 0 10 20 30 40 50 60 70 80 90 100
goods
Units of 80 79 77 74 70 65 58 48 35 19 0
services
Price Quantity Quantity
Demanded Supplied
$10 10 60
$8 20 45
$6 30 30
$4 40 15
$2 50 0