Five models your students can push around until they understand them. Choose one to begin.
Each model runs entirely in this page — nothing to install, and it works on a phone. Where a figure comes from published research it is marked cited and the study is named; where it is a teaching value reasoned from the determinants it is marked estimate. The two are never mixed silently.
Scarcity, choice and opportunity cost. Shift the frontier, move the economy inside it, and work through the scenarios and policies that cause each.
Capital goods and consumer goods use quite different resources, so the frontier is bowed out.
Something happens to the economy. Each one is paired with its opposite, so every rise has a fall.
Each policy names the factor of production it acts on. Sizes on the diagram are illustrative — they show direction, not a measured effect.
Evaluation
Describe anything that happens to the economy, or any policy a government might use. Claude reads it against the goods on your axes and works out what the diagram should do.
Evaluation
Nothing saved yet.
Opportunity cost is measured on the frontier at point A: it is the amount of the vertical good given up to gain ten more units of the horizontal good. On a bowed-out frontier that figure rises as the economy moves right, because resources are not equally suited to both goods; on a straight-line frontier it is constant.
How sharply quantity responds to price, for real goods and services — with published estimates where they exist and reasoned ones where they do not.
Evidence
Elasticity is not fixed. Apply a condition and see how it moves — these are reasoned adjustments, not measured figures.
A country, a year, an event — anything with no published estimate. The reasoning is shown in full so you can argue with it.
PED PES
Watch for
A per-unit tax on this good, using its own elasticities. Everything below follows from them. Change the good in the Good tab.
This is a competitive model, so the most a consumer can bear is 100% of the tax. Real markets do not always behave: cigarettes are an oligopoly, and studies of US cigarette taxes repeatedly find over-shifting — pass-through coefficients of roughly 1.02 to 1.18, with Harris (1987) finding price rises of about double the tax. Firms use a tax rise as cover for a price rise of their own. Worth raising with a class whenever the diagram suggests producers absorb a third of a tobacco duty.
| A | Consumer surplus after the tax. |
| B | Tax revenue taken from consumers, through the higher price they pay. |
| C | Consumer share of the deadweight loss — trades that no longer happen. |
| D | Tax revenue taken from producers, through the lower price they keep. |
| E | Producer share of the deadweight loss. |
| F | Producer surplus after the tax. |
Before the tax: CS = A + B + C, PS = D + E + F, revenue = 0. After it: CS = A, PS = F, revenue = B + D, and C + E is lost to everyone.
Optional practice. Choose which way round you want to work.
Every figure badged cited comes from the study named here. Figures badged estimate are teaching values reasoned from the determinants, not measurements.
| Good | Value | Source |
|---|
How demand responds when incomes change — and why some goods do better in a recession than a boom.
Evidence
Income elasticity is what decides who wins and who loses as the economy moves through its cycle. Pick a phase.
For this good
What happens to demand for one good when the price of another changes — and why the sign of the answer is the whole point.
Evidence
Why the same increase in demand can create jobs, create inflation, or create both — depending entirely on where the economy already is.
Tip: drag the AD curve on the diagram to shift it, or use the slider.
The four components. Each cause below acts through one of them, which is the part students are usually asked to name.
Acts through
Watch for
| Flat | Deep spare capacity. Firms can raise output without bidding up wages or input prices, so extra demand creates jobs and no inflation. |
| Rising | Capacity is tightening. Extra demand still raises output, but shortages of labour and materials push the price level up too. |
| Vertical | Full employment. Output cannot rise at all, so extra demand goes entirely into the price level. This is demand-pull inflation with nothing to show for it. |
| SRAS | Upward sloping. In the short run some costs — wages above all — are fixed, so a higher price level raises profit margins and firms produce more. |
| LRAS | Vertical at full-employment output. In the long run output is set by the supply side alone: labour, capital, land and technology. Demand determines only the price level. |
| Gaps | Where AD meets SRAS to the right of LRAS there is an inflationary gap; to the left, a recessionary one. The neo-classical view is that SRAS then adjusts until the gap closes. |
The same economy, plotted as unemployment against inflation instead of output against the price level. Moving AD moves the point along the short-run curve; expectations move the curve itself.
| SRPC | The short-run trade-off. With expectations fixed, a government can buy lower unemployment by accepting higher inflation — moving along the curve. |
| LRPC | Vertical at the natural rate of unemployment. In the long run there is no trade-off at all: whatever inflation rate you settle at, unemployment returns here. |
| Shifts | When people come to expect the higher inflation, the short-run curve shifts up and the economy returns to the natural rate — at a permanently worse inflation rate. That is stagflation in one diagram. |
| Moving it | The only way to lower unemployment permanently is to lower the natural rate itself, which takes supply-side policy — exactly as raising Yｆｅ does on the AD/AS diagram. |
Demand-side policies move the economy along the supply curve. Supply-side policies move the curve itself. Whether a demand-side policy delivers jobs or just inflation depends on where you already are.
Evaluation