micro graphs

Basic competitive market graph

Demand is MPB and supply is MPC. Equilibrium occurs where D = S. At equilibrium P = MC and the market is allocatively efficient.

Consumer and producer surplus graph

Consumer surplus is above price and below demand. Producer surplus is below price and above supply. Total surplus is maximized at equilibrium.

Price ceiling graph

A binding price ceiling is set below equilibrium. It creates a shortage because Qd > Qs. It causes deadweight loss and inefficiency.

Price floor graph

A binding price floor is set above equilibrium. It creates a surplus because Qs > Qd. It causes deadweight loss and inefficiency.

Negative externality in production

Demand is MSB and supply is MPC. MSC is above MPC. Market equilibrium is where MSB = MPC, but socially optimal is where MSB = MSC. This leads to overproduction and deadweight loss. A tax corrects it.

Negative externality in consumption

Supply is MSC and demand is MPB. MSB is below MPB. Market equilibrium is where MPB = MSC, but socially optimal is where MSB = MSC. This leads to overconsumption and deadweight loss. A tax or regulation corrects it.

Positive externality in production

Demand is MSB and supply is MPC. MSC is above MPC. Market equilibrium is where MSB = MPC, but socially optimal is where MSB = MSC. This leads to underproduction and deadweight loss. A subsidy corrects it.

Positive externality in consumption

Supply is MSC and demand is MPB. MSB is above MPB. Market equilibrium is where MPB = MSC, but socially optimal is where MSB = MSC. This leads to underconsumption and deadweight loss. A subsidy or government provision corrects it.

Monopoly graph

Demand equals AR and MR is below demand. Output is where MR = MC and price is taken from demand. Monopoly is inefficient because P > MC and creates deadweight loss.

Perfect competition vs monopoly

Perfect competition is efficient because P = MC. Monopoly is inefficient because P > MC and creates deadweight loss.

Monopolistic competition graph

Demand is downward sloping and MR is below demand. Output is where MR = MC and price comes from demand. In the long run economic profit is zero but P > MC so inefficiency exists.

Oligopoly

Firms are interdependent and prices are rigid. Firms may collude to act like a monopoly and restrict output to raise price.

Efficiency conditions

Allocative efficiency occurs when P = MC. Social efficiency occurs when MSB = MSC. Any deviation creates deadweight loss.

Shortage vs surplus

Shortage occurs when Qd > Qs. Surplus occurs when Qs > Qd.

Externality shortcut

Negative production is MPC vs MSC. Negative consumption is MPB above MSB. Positive production is MPC below MSC. Positive consumption is MPB below MSB.