00:00:00
hi everyone what a quality video for you
00:00:02
guys we know how important diagrams are
00:00:05
to back up your analysis to back up your
00:00:07
evaluation in essays but boy if you can
00:00:10
bring in power diagrams deep stunning
00:00:13
diagrams knock the socks off your
00:00:15
examiners you're going to score even
00:00:16
higher credit and that's exactly what
00:00:18
this video is for stunning diagrams five
00:00:21
diagrams here which you should way up in
00:00:23
your a vision know really well if
00:00:25
relevant bring them into your micro
00:00:26
essays and watch those marks go up this
00:00:29
video complement my my other video on
00:00:31
power micro diagrams watch them both
00:00:33
make sure you have them all in use them
00:00:35
in your essays and you're going to be in
00:00:36
a great position here we go what's the
00:00:38
first diagram to consider well use the
00:00:41
Monopoly diagram to showcase the
00:00:43
difference between Monopoly Market
00:00:45
outcomes and competitive market outcomes
00:00:48
here we have a very simple Monopoly
00:00:50
diagram to show Monopoly outcomes we
00:00:52
assume profit maximization that will
00:00:54
take us to qm M for Monopoly price from
00:00:57
the AR curve takes us to PM but then
00:01:00
compare that to competitive market
00:01:02
outcomes firms who operate in very
00:01:04
competitive markets we know will be
00:01:05
allocatively efficient taking us to
00:01:07
where P or ar equals MC that's over here
00:01:11
call that QC competitive outcomes price
00:01:13
PC so immediately we can see the harm of
00:01:16
Monopoly on this diagram by comparing to
00:01:19
competitive market outcomes how
00:01:20
monopolies restrict output at qm and
00:01:23
charge exploitative prices prices Beyond
00:01:26
marginal cost we can also see that there
00:01:29
is a dead welfare loss when they do that
00:01:31
it's going to be this triangle here that
00:01:33
enti triangle this little bit is your
00:01:35
dead weight loss of consumer surplus
00:01:37
this bit is your dead weight loss of
00:01:38
producer Surplus so great to show the
00:01:40
harms of Monopoly absolutely or any
00:01:43
policies that maybe allows Monopoly
00:01:45
outcomes to occur or if mergers or any
00:01:47
kind of anti-competitive practices are
00:01:49
being used taking you to Monopoly
00:01:51
outcomes great to show the basic
00:01:54
difference but also this diagram is
00:01:56
great if you want to reverse the other
00:01:58
way right so if if a monop Market is
00:02:00
becoming more like a competitive market
00:02:03
maybe through policy or otherwise then
00:02:05
you can show the reverse from pm to PC
00:02:07
qm to QC the gain of competitive market
00:02:10
outcomes and also the gain of consumer
00:02:13
surplus this trapesium here as we see
00:02:16
that movement so yeah whether it's
00:02:17
competition policy whether it's
00:02:19
privatization deregulation
00:02:21
nationalization or anything that's
00:02:23
making markets more competitive a
00:02:25
diagram you can use so very powerful
00:02:26
thing to do here quite simple but to
00:02:29
compare Monopoly outcomes and
00:02:30
competitive market outcomes is something
00:02:32
you're very likely going to have to do
00:02:34
in your micro essays this is the diagram
00:02:36
you can draw to Showcase that keep going
00:02:39
next is one of my favorite evaluation
00:02:41
points of a monopoly market and how we
00:02:44
know in theory a monopoly is
00:02:46
productively inefficient but despite
00:02:49
that inefficiency given its size might
00:02:51
be able to exploit significantly greater
00:02:53
economies of scale than very small firms
00:02:56
in highly competitive markets who
00:02:58
themselves might be productively
00:02:59
efficient but given that small size by
00:03:01
not be able to exploit anywhere near the
00:03:03
level of economy of scale that a
00:03:05
monopoly can the way to diagrammatically
00:03:08
Showcase that is by taking a long run
00:03:10
average cost curve put a monopoly with
00:03:12
that short run AC short run MC further
00:03:15
down the L curve to show greater
00:03:18
economies of scale exploitation compared
00:03:20
to very very small firms in Cutthroat
00:03:23
competitive markets who can grow to a
00:03:25
very high size and therefore they're
00:03:27
much higher up on the L curve so the
00:03:29
economies of scale they're exploiting
00:03:31
much less the end result is their costs
00:03:34
and their quantity significantly in a
00:03:36
worse position than than a monopoly who
00:03:38
despite their inefficiency might have a
00:03:40
lower cost and thus be able to price
00:03:42
lower and produce higher quantities than
00:03:44
teeny firms in very very competitive
00:03:46
markets so a simple diagram really but a
00:03:49
great way to Showcase that evaluation
00:03:51
point the gains of Monopoly given
00:03:53
greater economies of scale you could
00:03:55
also use this diagram to illustrate the
00:03:57
major benefits of a natural monopoly how
00:03:59
one one firm that dominates the market
00:04:01
in a natural monopoly where there are
00:04:03
huge economies of scale are more likely
00:04:05
to reach the minimum efficient scale
00:04:07
reach kind of towards the bottom of this
00:04:09
LC curve compared to if you had
00:04:11
competitive market outcomes you can also
00:04:13
draw this diagram to illustrate that
00:04:16
benefit of natural monopoly but there
00:04:17
you go great diagram one you're very
00:04:19
likely to be using I'm sure next is
00:04:22
something you must know and something
00:04:23
you must be able to do and that is
00:04:26
Shifting your cost curves with a
00:04:27
business diagram or a market structure
00:04:29
structures related diagram but know that
00:04:32
if fixed cost change it's only the AC
00:04:35
curve that will shift either up or down
00:04:37
and that is because the rate of change
00:04:39
of costs will not change so MC won't
00:04:41
change in that situation whereas a
00:04:43
change in variable costs will affect the
00:04:46
rate of change of cost so you shift AC
00:04:48
and you shift MC in that situation so
00:04:51
imagine that you have to show a change
00:04:53
in variable costs diagrammatically or
00:04:56
you want to show that diagrammatically
00:04:58
maybe because of a windfall tax which is
00:04:59
a tax per unit or maybe a windfall tax
00:05:02
on Revenue which again will affect
00:05:04
variable costs the way you would do it
00:05:05
is like this so take your bog stand and
00:05:07
Monopoly diagram and to shift up your AC
00:05:10
and your MC curve so shift up of AC like
00:05:13
this maybe call it ac2 a shift off of MC
00:05:17
but still cutting AC at its lowest point
00:05:20
which will take us
00:05:21
there now where mc2 equals Mr that's
00:05:25
going to be profit Max that's over here
00:05:27
so let's call that quantity Q2
00:05:30
and price from the AR curve P2 so we can
00:05:35
see the impact of that just like a
00:05:36
normal tax would do increasing prices
00:05:39
and reducing quantity but we can also
00:05:41
see the squeeze of profit so AR is where
00:05:43
P2 is but now AC with the new AC curve
00:05:47
is over there at profit Max Q2 call that
00:05:49
C2 so the black box is the new level of
00:05:52
profit considerably less than the blue
00:05:55
box prior to it so all the outcomes you
00:05:57
want to show being shown here higher
00:05:59
price lower quantity lower profits being
00:06:02
made brilliant the unintended
00:06:03
consequences or the tradeoffs of a
00:06:06
winfall tax per unit for example or a
00:06:08
winfall tax on revenue or just more
00:06:10
generally a rise in variable cost here's
00:06:12
how you would do it but remember fix
00:06:14
fixed costs only AC variable costs AC
00:06:17
and MC if you have to do that you know
00:06:19
how to do it now now a really critical
00:06:23
diagram if you want to illustrate the
00:06:25
benefits of a highly competitive labor
00:06:27
market a labor market that's working
00:06:29
well will give a lot of benefits this is
00:06:32
the diagram you will draw draw your
00:06:34
perfectly competitive labor market
00:06:35
diagram we have the market on the left a
00:06:38
firm who's a wage taker on the right we
00:06:40
assume that these firms are profit
00:06:42
maximizing employees so they're going to
00:06:44
employ up until where MRP is equal to
00:06:47
the marginal cost of Labor which is
00:06:49
there that's going to give employment of
00:06:51
call it Q2 that's your full diagram but
00:06:54
from there you can derive the major
00:06:56
benefits of a labor market working well
00:06:59
for example how workers at Q2 are paid
00:07:01
exactly equal to their MRP these are
00:07:04
efficient wages if workers are not paid
00:07:07
equal to that MRP they can go to their
00:07:09
employer bargain for a higher wage or
00:07:11
move to a different employer and get
00:07:13
that higher wage that way so we like
00:07:15
efficient wages workers are paid equal
00:07:17
to their productivity that's a good
00:07:19
thing but also on this diagram we can
00:07:20
see that q1 is maximum employment no
00:07:23
other wage rate whether above
00:07:25
equilibrium or below equilibrium will
00:07:27
give employment as high as q1 so again
00:07:30
great news for workers looking to get
00:07:32
into work looking to earn income and
00:07:33
boost their living standards that's the
00:07:35
beneficial outcome here we can also see
00:07:37
how wages are determined by the forces
00:07:39
of demand and Supply no one is setting
00:07:42
wages whether a firm or the government
00:07:44
and we get inefficient outcomes that way
00:07:46
no wages are determined by the forces of
00:07:49
demand and Supply so we're always going
00:07:50
to get to equilibrium we're always going
00:07:52
to get to efficient wages that way but
00:07:54
also how there shouldn't be any
00:07:55
long-term wage differentials if labor
00:07:58
markets are working well because of
00:08:00
Supply shifts so wages are low in one
00:08:02
profession imagine there'll be an exodus
00:08:04
of workers from that profession Supply
00:08:06
left and an influx of workers into the
00:08:09
profession where wages are higher Supply
00:08:10
right closing the wage differential so
00:08:13
this diagram can illustrate all of those
00:08:15
benefits if you're talking about Labor
00:08:18
markets working well or the benefits of
00:08:20
competitive labor markets bam we now
00:08:22
know the diagram to draw how to draw it
00:08:24
how to use it fantastic let's finish
00:08:26
strong shall we and lastly something
00:08:28
that seems so basic right your demand
00:08:30
and Supply shifts but there is a way for
00:08:33
you to show off tremendously when you're
00:08:35
drawing these shifts and that is to
00:08:36
remember that when a curve shifts it
00:08:39
shifts for nonprice reasons at the
00:08:41
original price in the market and that
00:08:43
will always create a disequilibrium that
00:08:46
will cause prices to change when prices
00:08:48
change there are functions that kick in
00:08:50
right functions of the price mechanism
00:08:52
that will move the market to a new
00:08:54
equilibrium so if relevant when you're
00:08:56
drawing these diagrams go into that full
00:08:58
process take a very simple example this
00:09:00
is a demand curve shifting to the right
00:09:02
such a basic diagram we know the
00:09:04
Market's going to finish at P2 Q2 we get
00:09:07
that but if relevant go into the detail
00:09:09
of how that works so this curve shifts
00:09:11
at the original price of P1 the
00:09:13
disequilibrium will now Supply at the
00:09:16
price of P1 still is at q1 whereas
00:09:18
demand is now at QD that's an excess
00:09:21
demand that would put upward pressure on
00:09:23
price let's say from P1 to P2 and then
00:09:26
go into the functions of higher prices
00:09:28
how higher prices will signal that there
00:09:30
has been an excess demand but crucially
00:09:32
the need for more resources in the
00:09:33
market higher prices incentivize firms
00:09:36
because of higher prices to produce more
00:09:38
output now and make more profit that way
00:09:40
that's the incentive function of higher
00:09:42
prices and expansion along the supply
00:09:44
curve makes that effect very clear
00:09:46
higher prices also ration Resources by
00:09:48
discouraging demand contraction along
00:09:51
the demand curve makes that clear and
00:09:52
low and beholders last two effects get
00:09:54
us to that new equilibrium Q2 which is
00:09:57
allocative efficiency where equals
00:09:59
Supply no more access demand so if
00:10:01
relevant go into all of that not just oh
00:10:03
look we're at P1 q1 and then to P2 Q2 go
00:10:07
into the functions of price go into the
00:10:09
dise equilibrium at the original price
00:10:11
and show how the market will return to a
00:10:13
new equilibrium when there is a shift
00:10:14
would be stunning if relevant when
00:10:16
you're drawing these diagrams in your
00:10:18
essays your micro essays so there you
00:10:20
have it guys great diagrams to be able
00:10:22
to draw there so there you have it five
00:10:24
incredible diagrams for you to show off
00:10:26
with in your micro essays use these well
00:10:29
and see those marks go up know that this
00:10:31
video compliments the other video I have
00:10:33
on power diagrams for micro essays make
00:10:35
sure you've watched that one as well
00:10:37
there's so much more to come from me
00:10:39
stay tuned to the channel make sure
00:10:40
you're subscribe and just watch
00:10:42
everything coming your way as we look
00:10:44
forward to Smashing these exams together
00:10:46
thanks for watching this one guys can't
00:10:48
wait to see you in future videos
00:10:50
[Music]
