AP® Microeconomics graphs

How to draw it

1. Put one good on each axis and label each axis with that good's name.
2. Draw the curve from one axis to the other, bowed out from the origin. Bowed out means the opportunity cost rises as you make more of a good; a straight line means it stays constant.
3. Label it PPC. Points on the curve are efficient, points inside are inefficient (resources sitting idle or wasted), and points outside can't be reached with today's resources.
4. For growth, draw a second curve farther out, label it PPC₂ and add an arrow.

Common shifts

More or better resources, or better technology for both goods

The whole curve shifts out: economic growth.

Better technology for just one good

The curve pivots out along that good's axis only; the other intercept stays put.

Resources are lost (a war, a natural disaster)

The curve shifts in.

Unemployment rises in a recession

The economy moves to a point inside the curve. The curve itself doesn't move.

The country makes more capital goods today

Less for consumers now, but the curve shifts out farther in the future.

How to draw it

1. Label the vertical axis Utility and the horizontal axis Quantity.
2. Draw total utility (TU) rising steeply at first, flattening out, peaking and then turning down.
3. Draw marginal utility (MU) sloping down. It hits the horizontal axis at the same quantity where TU peaks.
4. Mark that quantity on the horizontal axis with a dashed line up to the top of TU.

Common shifts

MU is positive but falling

TU still rises, but by less with each unit.

MU reaches zero

TU is at its highest point.

MU turns negative

TU falls: one more unit makes you worse off.

Choosing between two goods on a budget

Not shown on this graph: buy whichever next unit gives the most MU per dollar (MU ÷ P) until MU ÷ P is equal for both goods and the money is spent.

How to draw it

1. Label the vertical axis Price (P) and the horizontal axis Quantity (Q).
2. Draw demand (D) sloping down and supply (S) sloping up.
3. Mark where they cross with dashed lines to both axes, and label the equilibrium price Pe and quantity Qe.
4. Shade consumer surplus: the triangle under D and above Pe. Shade producer surplus: the triangle above S and below Pe.
5. For a shift, draw the new curve (D₂ or S₂), add an arrow, and mark the new price and quantity on both axes.

Common shifts

Demand increases (more income for a normal good, a substitute gets pricier, more buyers)

D shifts right: price and quantity both rise.

Supply decreases (pricier inputs, fewer sellers)

S shifts left: price rises and quantity falls.

Supply increases (cheaper inputs, better technology)

S shifts right: price falls and quantity rises.

Both curves shift at once

One of price or quantity is certain; the other depends on which shift is bigger, so it's indeterminate.

The good's own price changes

A movement along the curves (a change in quantity demanded or supplied), not a shift.

How to draw it

1. Draw supply and demand crossing at Pe and Qe.
2. For a ceiling, draw a horizontal line below Pe and label it Price ceiling. For a floor, draw it above Pe and label it Price floor.
3. At the controlled price, mark quantity supplied (Qs) on the supply curve and quantity demanded (Qd) on the demand curve. The gap is the shortage (ceiling) or surplus (floor).
4. Shade deadweight loss: the triangle between D and S from the quantity actually traded out to Qe.

Common shifts

A ceiling set above Pe, or a floor set below Pe

Not binding: the market stays at Pe and Qe.

A binding price ceiling

Shortage of Qd − Qs. Only Qs is sold, producer surplus falls, and there's deadweight loss.

A binding price floor

Surplus of Qs − Qd. Only Qd is bought, consumer surplus falls, and there's deadweight loss.

A minimum wage above the market wage

A floor in the labor market: more people want jobs than firms hire, so there's unemployment.

Demand rises while a binding ceiling stays put

The shortage gets bigger.

How to draw it

1. Draw demand and supply (S₁) crossing at Pe and Qe.
2. For a tax, draw S₂ above S₁ by exactly the tax at every quantity, with an arrow. Mark the new quantity Q₂ where S₂ crosses D.
3. Mark the price buyers pay, Pb, on D at Q₂. Go straight down to S₁ for the price sellers keep, Ps. The gap Pb − Ps is the tax.
4. Shade tax revenue (the rectangle from Ps to Pb, out to Q₂) and deadweight loss (the triangle between D and S₁ from Q₂ to Qe).
5. For a subsidy, draw S₂ below S₁ by the subsidy. Quantity rises past Qe, buyers pay Pb (lower) and sellers receive Ps = Pb + subsidy; deadweight loss is the triangle between S₁ and D from Qe to Q₂.

Common shifts

Demand is less elastic than supply

Buyers bear more of the tax: Pb rises a lot while Ps falls a little. Whichever side is less elastic pays more.

Demand (or supply) is perfectly inelastic

Quantity doesn't change, so there's no deadweight loss, and that side pays the whole tax.

A bigger tax, or more elastic demand and supply

Quantity falls more, so deadweight loss is bigger.

A per-unit subsidy

S shifts down: quantity rises, buyers pay less, sellers get more, the government pays subsidy × Q₂, and overproduction causes deadweight loss.

The same tax charged to buyers instead of sellers

Demand shifts down by the tax instead, and you end up at the same Pb, Ps and Q₂.

How to draw it

1. Draw domestic demand (Dd) and domestic supply (Sd). Where they cross is the no-trade price Pa and quantity Qa.
2. Draw a horizontal line at the world price (Pw). Below Pa, the country imports; above Pa, it exports.
3. At Pw, read domestic quantity supplied (Qs₁) off Sd and quantity demanded (Qd₁) off Dd. Imports are the gap from Qs₁ to Qd₁.
4. For a tariff, draw a second horizontal line at Pw + t. Domestic production rises to Qs₂ and consumption falls to Qd₂, so imports shrink.
5. Shade tariff revenue (the rectangle t × imports, between the two price lines from Qs₂ to Qd₂) and the two deadweight-loss triangles on either side of it.

Common shifts

Opening to trade with Pw below the no-trade price

The country imports Qd − Qs. Price falls, consumer surplus rises by more than producer surplus falls, so total surplus rises.

Opening to trade with Pw above the no-trade price

The country exports Qs − Qd. Producers gain more than consumers lose, so total surplus rises.

A tariff

Domestic price rises to Pw + t, domestic production rises, consumption and imports fall. Consumer surplus falls, producer surplus rises, the government collects t × the new imports, and there are two deadweight-loss triangles.

An import quota

Raises the domestic price and cuts imports much like a tariff, but the government collects no tariff revenue. You won't be asked to graph a quota.

A tariff that lifts the price to Pa or higher

Imports stop and the market goes back to the no-trade outcome.

How to draw it

1. Label the horizontal axis Quantity of labor (L) and the vertical axis Quantity of output.
2. Draw total product (TP) rising more and more steeply, then less steeply, then peaking and turning down.
3. Below it, on the same labor scale, draw marginal product (MP) rising and then falling, and average product (AP) as a flatter hill.
4. Make MP cross AP at the top of AP, and hit zero at the labor where TP peaks. Diminishing marginal returns begin where MP starts to fall.

Common shifts

MP is above AP

AP is rising: a worker who adds more than the average pulls the average up.

MP is below AP

AP is falling.

MP starts falling

Diminishing marginal returns: TP still rises, but by less with each worker.

MP reaches zero

TP is at its highest point; another worker adds nothing.

Better technology or more equipment for each worker

TP, MP and AP all shift up.

How to draw it

1. Label the vertical axis Cost and the horizontal axis Quantity (Q).
2. Draw MC dipping and then rising steeply (a swoosh).
3. Draw AVC and ATC as U shapes with ATC above AVC. The gap between them is AFC, so they get closer as Q grows but never touch.
4. Make MC cross AVC and then ATC from below, each at its lowest point.
5. If asked, add AFC falling the whole way and flattening toward the quantity axis.

Common shifts

Fixed cost rises (rent, a license fee, a lump-sum tax)

AFC and ATC shift up. MC and AVC don't move.

A variable cost rises (higher wages, a per-unit tax)

MC, AVC and ATC all shift up. AFC doesn't change.

Cheaper inputs or better technology

MC, AVC and ATC shift down.

MC is below an average cost

That average is falling; once MC is above it, the average rises. That's why MC crosses at the minimum.

How to draw it

1. Label the vertical axis Cost and the horizontal axis Quantity (Q).
2. Draw LRATC as a wide U, with a flat bottom if you like, and label it.
3. Label the falling part economies of scale, the flat part constant returns to scale and the rising part diseconomies of scale.
4. Mark the minimum efficient scale: the smallest quantity where LRATC reaches its lowest level.

Common shifts

Economies of scale

Bigger firms can specialize and spread out costs, so LRATC falls as output grows.

Diseconomies of scale

A firm that's too big is hard to manage and coordinate, so LRATC rises.

Minimum efficient scale is small compared with market demand

There's room for many firms, as in a competitive industry.

Minimum efficient scale is large compared with market demand

Only one or a few firms can produce cheaply: a natural monopoly or an oligopoly.

How to draw it

1. Draw two graphs side by side: the market on the left and one firm on the right.
2. On the market graph, draw S and D and mark the price P₁ and quantity Q₁ where they cross.
3. Carry P₁ straight across to the firm graph and draw a horizontal line there labeled P = MR = D = AR. The firm can sell as much as it wants at that price.
4. Draw the firm's MC, ATC and (if asked) AVC. The firm makes q₁, where MR = MC.
5. Go up from q₁ to ATC. If the price is above ATC, shade the profit rectangle; if it's below, shade the loss.

Common shifts

Market demand increases

The market price rises, the firm's P = MR line moves up, and the firm makes more (up along its MC) for more profit in the short run.

Price falls below ATC but stays above AVC

The firm takes a loss but keeps producing in the short run, because revenue covers all its variable cost and some of its fixed cost.

Price falls below the minimum of AVC

The firm shuts down and makes nothing; its loss is its fixed cost.

Fixed cost rises

ATC shifts up but MC doesn't, so the firm's output stays the same in the short run and its profit falls.

How to draw it

1. Start from the side-by-side graphs with the firm earning a profit at P₁.
2. On the market graph, shift supply right (S₁ to S₂) as new firms enter, with an arrow. The market price falls to P₂.
3. Stop the shift where P₂ equals the minimum of ATC. On the firm graph, draw the new P = MR = D = AR line just touching the bottom of ATC, where MC crosses it too.
4. Label the firm's quantity q₂ at that point. There's no profit or loss rectangle to shade.

Common shifts

Firms are earning short-run profits

New firms enter, market supply shifts right and the price falls until P = minimum ATC.

Firms are taking short-run losses

Firms leave, market supply shifts left and the price rises until P = minimum ATC.

Market demand rises for good (in a constant-cost industry)

The price rises at first, then entry brings it back down to the same minimum ATC, with more firms and a larger market quantity.

Zero economic profit

That's normal profit: the owners still cover their opportunity costs, so firms are happy to stay.

How to draw it

1. Label the vertical axis Price, costs and the horizontal axis Quantity (Q).
2. Draw demand (D) sloping down and MR below it. For a straight-line demand curve, MR starts at the same point on the price axis and is twice as steep, so it hits the quantity axis halfway to where D would.
3. Draw MC (a swoosh) and ATC (a U), with MC through the bottom of ATC.
4. Find Qm where MR = MC. Go straight up to D for the price Pm.
5. Go up from Qm to ATC. Profit is the rectangle between Pm and ATC, out to Qm. Deadweight loss is the triangle between D and MC from Qm to Qs, where D crosses MC.

Common shifts

Fixed cost rises, or a lump-sum tax

ATC shifts up but MC doesn't, so Qm and Pm stay the same and profit falls.

A per-unit tax

MC and ATC shift up, so the monopoly makes less and charges more.

Demand increases

D and MR shift right; the monopoly makes more and usually charges more.

Perfect price discrimination

Each buyer pays the most they're willing to, so MR = D. The firm makes the quantity where D meets MC: no deadweight loss, but no consumer surplus either.

Where on demand a monopoly produces

Always on the elastic part, where MR is positive.

How to draw it

1. Draw D and MR as for any monopoly.
2. Draw ATC falling through the whole range where it crosses demand, and MC below ATC (it's often drawn flat or falling).
3. Unregulated: find Qm where MR = MC, go up to D for Pm, and shade profit between Pm and ATC.
4. Socially optimal price: where MC crosses D (Ps and Qs). The price is below ATC there, so shade the loss; the firm needs a lump-sum subsidy to stay open.
5. Fair-return price: where ATC crosses D (Pf and Qf). Economic profit is zero, with a little deadweight loss left.

Common shifts

The regulator sets P = MC

Output rises to the efficient Qs with no deadweight loss, but P is below ATC, so the firm takes a loss and needs a lump-sum subsidy.

The regulator sets P = ATC (fair return)

Zero economic profit. Output is between Qm and Qs, with less deadweight loss than an unregulated monopoly.

A lump-sum subsidy

Works like a cut in fixed cost: it covers the loss without changing MC, price or output.

Splitting the firm into two

Each smaller firm would have a higher average cost, which is why one firm serving the market is cheaper.

How to draw it

1. Draw it like a monopoly: D sloping down (usually flatter, since there are close substitutes), MR below it, MC and ATC.
2. Short run: find Q where MR = MC, go up to D for the price, and shade profit (or loss) between the price and ATC.
3. Long run: draw D just touching (tangent to) ATC at the quantity where MR = MC. Price equals ATC, so profit is zero.
4. Show excess capacity: the long-run quantity is to the left of the bottom of ATC.

Common shifts

Firms earn short-run profit

New firms enter, so each firm's demand (and MR) shifts left until D is tangent to ATC.

Firms take short-run losses

Firms leave, so each remaining firm's demand shifts right until D is tangent to ATC.

A firm advertises successfully

Its demand shifts right and may get less elastic, but ATC rises with the cost of the ads.

In long-run equilibrium

P is above MC (not allocatively efficient) and above minimum ATC (not productively efficient: excess capacity).

How to draw it

1. Draw two graphs side by side, each with Wage (W) up and Quantity of labor (L) across: the market on the left and one firm on the right.
2. On the market graph, draw labor demand (D) sloping down and labor supply (S) sloping up, and mark the wage We and the quantity Le where they cross.
3. Carry We straight across to the firm graph as a horizontal line labeled S = MFC. For a wage taker, each extra worker costs exactly the wage.
4. Draw the firm's MRP sloping down (it's the firm's demand for labor) and mark Lf where MRP = MFC.

Common shifts

Demand for the product rises (its price goes up)

MRP = MP × P rises, so labor demand shifts right: the market wage and employment rise.

Workers get more productive (training, better tools)

MP rises, so MRP and labor demand shift right.

More people look for work in this market

Labor supply shifts right: the market wage falls, each firm's MFC line drops and it hires more.

A minimum wage above the market wage

A price floor: more people want jobs than firms will hire, so there's unemployment.

How to draw it

1. Label the vertical axis Wage (W) and the horizontal axis Quantity of labor (L).
2. Draw MRP (the demand for labor) sloping down and labor supply (S) sloping up.
3. Draw MFC above S. For a straight-line supply curve, MFC starts at the same point on the wage axis and is twice as steep.
4. Find Lm where MRP = MFC, then go straight down to S for the wage Wm.
5. Compare with a competitive market (Lc and Wc, where MRP crosses S) and shade the deadweight loss between MRP and S from Lm to Lc.

Common shifts

A minimum wage set between Wm and Wc

MFC becomes flat at the minimum wage up to the supply curve, so the firm hires more workers and pays them more.

A minimum wage set exactly at Wc

Employment and the wage reach the competitive level, and the deadweight loss is gone.

MRP rises (workers more productive or the product pricier)

The monopsonist hires more workers at a higher wage.

How to draw it

1. Label the vertical axis Price (P) and the horizontal axis Quantity (Q).
2. Draw demand as marginal private benefit (MPB) and supply as marginal private cost (MPC). Mark the market quantity Qm and price Pm where they cross.
3. Production externality (a polluting factory): draw MSC above MPC, label the demand curve MPB = MSB. Consumption externality (secondhand smoke): draw MSB below MPB, label the supply curve MPC = MSC.
4. Mark the socially optimal quantity Qs where MSB = MSC. It's less than Qm.
5. Shade the deadweight loss: the triangle between MSC and MSB from Qs to Qm, with its point at Qs.

Common shifts

A per-unit (Pigouvian) tax equal to the external cost

For a production externality, a tax on sellers shifts MPC up to MSC; for a consumption externality, a tax on buyers shifts MPB down to MSB. Either way the market makes Qs and the deadweight loss disappears.

The external cost gets bigger

The gap between the private and social curves widens, so overproduction and deadweight loss grow.

Regulation that caps output at Qs

Also reaches the socially optimal quantity.

How to draw it

1. Label the vertical axis Price (P) and the horizontal axis Quantity (Q).
2. Draw demand as marginal private benefit (MPB) and supply as marginal private cost (MPC), and mark Qm and Pm where they cross.
3. Consumption externality (a flu shot also protects others): draw MSB above MPB, label the supply curve MPC = MSC. Production externality (a beekeeper's bees pollinate nearby farms): draw MSC below MPC, label the demand curve MPB = MSB.
4. Mark the socially optimal quantity Qs where MSB = MSC. It's more than Qm.
5. Shade the deadweight loss: the triangle between MSB and MSC from Qm to Qs, with its point at Qs.

Common shifts

A per-unit subsidy to buyers equal to the external benefit

MPB shifts up to MSB, so the market makes Qs and the deadweight loss disappears.

A per-unit subsidy to sellers equal to the external benefit

MPC shifts down by the subsidy and the market also reaches Qs.

The external benefit gets bigger

The gap between the private and social curves widens, so underproduction and deadweight loss grow.

How to read it

1. Demand is both the buyers' marginal private benefit and the marginal social benefit (MPB = MSB), with MR below it, twice as steep.
2. MPC is the firm's own marginal cost. MSC sits above it by the external cost of each unit.
3. Find what the monopoly does: Qm where MR = MPC, with the price Pm read straight up on demand.
4. Find the socially optimal quantity: Qs where MSB = MSC, with price Ps.
5. Compare them. Here the external cost is big, so Qm is more than Qs even though the monopoly holds back output, and the deadweight loss is the triangle between MSC and MSB from Qs to Qm.

Common shifts

The external cost is small

Qs can be more than Qm: the monopoly's usual cut in output outweighs the pollution, so it makes too little, and the deadweight loss runs from Qm out to Qs.

A per-unit tax equal to the external cost

MPC shifts up to MSC, but the monopoly still sets MR = MSC, so it ends up making less than Qs. A tax that fixes a competitive market can overshoot with a monopoly.

How to read it

1. Households are lined up from poorest to richest along the horizontal axis; the vertical axis shows the share of all income those households get together.
2. The straight 45-degree line is perfect equality: the poorest 40% of households get 40% of the income.
3. The farther a curve sags below that line, the more unequal incomes are.
4. The Gini coefficient measures that sag: 0 is perfect equality and 1 is complete inequality. You won't have to calculate it.

Common shifts

More progressive taxes and transfer payments

The curve moves toward the line of equality and the Gini coefficient falls.

Incomes grow faster at the top than at the bottom

The curve sags farther from the line of equality and the Gini coefficient rises.

Comparing two countries

The country whose curve is closer to the line of equality has less inequality and a lower Gini coefficient.