The Definitive Diagram Masterlist

#VERIDIAN V6 Economics | Pearson Edexcel IAL WEC12/01

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#BEFORE ANYTHING ELSE: THE DIAGRAM RULES

Rule 1 — Axes are non-negotiable: Y-axis must say "Price level" — not "Price," not "Prices," not "P," not "Average price level." X-axis must say "Real output" or "Real GDP" — not "Output," not "Quantity," not "Q," not "Y." Wrong labelling = Knowledge mark lost. Confirmed every examiner report.

Rule 2 — Dotted lines to BOTH axes: Every equilibrium point must have dotted lines running horizontally to the Y-axis (showing the price level) and vertically to the X-axis (showing the real output level). One dotted line = one lost Application mark.

Rule 3 — Written text alongside diagrams earns zero: On 4-mark Draw questions: write nothing. From Oct 2021 (verbatim): "There are no marks for additional text which some candidates have included to support their diagram." On extended questions: reference the diagram in your written chain with "as shown in the diagram, AD shifts from AD₁ to AD₂" — the written reference earns the mark, not the diagram alone.

Rule 4 — Draw the diagram only if you can label it completely: A partial diagram with missing curves or unlabelled axes earns fewer marks than a complete written chain with no diagram. If uncertain about a diagram's structure: write the chain and skip the diagram.

Rule 5 — The diagram must be referenced in the chain: A diagram that appears but is never mentioned in the written analysis earns no additional marks. The written reference to the diagram is what earns credit, not the diagram alone: "As illustrated in the diagram, the leftward shift of AD from AD₁ to AD₂ reduces real output from Y₁ to Y₂ and the price level from P₁ to P₂."

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#THE 5-STEP DIAGRAM PROTOCOL

Apply before drawing any diagram:

Step 1: Identify which diagram the question requires. Write the name at the top of your diagram space. Step 2: Draw axes. Label Y-axis first ("Price level"), then X-axis ("Real output"). Step 3: Draw all curves in their correct positions with correct shapes. Label each (AD, SRAS, LRAS, SRPC, etc.). Step 4: Mark the original equilibrium with a dot. Draw dotted lines to both axes. Label P₁ and Y₁. Step 5: Draw the shift with an arrow. Mark the new equilibrium. Draw dotted lines to both axes. Label P₂ and Y₂.

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#DIAGRAM 1 — AD/AS (CLASSICAL LRAS)

When to use: All macroeconomic effects requiring price level AND real output changes. Demand-side and supply-side policy effects. Recession, growth, inflation analysis.

Structure:

Price
level
   |          LRAS
   |           |
P₂ |.......... |.....(new equilibrium if AD rises)
   |           |    /
P₁ |...........|..../  <- original equilibrium
   |           | /
   |          /|
   |        /  |
   |      /    |
   |    AD₁  AD₂
   |________________________
              Y₁ Y₂    Real output

Axis labels:

• Y-axis: Price level
• X-axis: Real output

Key elements:

• LRAS: vertical line at full employment output (Yfe / Y₁)
• AD: downward sloping from top-left
• When AD shifts RIGHT: P rises (demand-pull inflation), Y rises (if below Yfe) or only P rises (if at Yfe)
• Original equilibrium: where AD₁ meets LRAS — label P₁ and Y₁ with dotted lines to both axes
• New equilibrium: where AD₂ meets LRAS — label P₂ and Y₂ with dotted lines to both axes

Written reference sentence: "As shown in the diagram, the rightward shift of AD from AD₁ to AD₂ increases the price level from P₁ to P₂, while real output remains at Y₁ (full employment) as LRAS is vertical — generating demand-pull inflation without a real output increase."

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#DIAGRAM 2 — AD/SRAS (SHORT-RUN EFFECTS)

When to use: Short-run supply shocks (cost-push inflation). Oil price increases. Stagflation. Any question where real output AND price level change in the short run from a supply-side shock.

Structure:

Price
level      SRAS₁ SRAS₂
   |         /    /
P₂ |......./..../
   |      /   /
P₁ |..../   /     <- original equilibrium where AD meets SRAS₁
   |   /  /
   |  / /
   | //
   |/
   |____________________
        Y₂ Y₁         Real output

Key elements:

• SRAS shifts LEFT when costs rise (oil, wages, raw materials): this SIMULTANEOUSLY raises P and reduces Y → stagflation
• SRAS shifts RIGHT when costs fall or productivity rises: P falls and Y rises simultaneously
• The simultaneity is the key teaching point: one shift produces two outcomes at once

Cost-push stagflation sequence:

1. SRAS₁ → SRAS₂ (leftward shift, labelled with arrow)
2. New equilibrium: higher P₂, lower Y₂
3. Dotted lines from new equilibrium to both axes

Written reference sentence: "As the diagram illustrates, the leftward shift of SRAS from SRAS₁ to SRAS₂ — caused by rising energy costs — simultaneously raises the price level from P₁ to P₂ and reduces real output from Y₁ to Y₂, producing stagflation: the coexistence of higher inflation and lower growth that monetary policy cannot resolve with a single instrument."

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#DIAGRAM 3 — AD/LRAS (SUPPLY-SIDE POLICY EFFECTS)

When to use: Supply-side policy effects on potential output. Education investment. Infrastructure. Any question asking how policy increases productive capacity.

Structure:

Price
level     LRAS₁ LRAS₂
   |         |    |
   |         |    |
P₁ |.........|....|......  <- price level may fall slightly
   |         | /  |
P₂ |......../|/   |
   |       / |    |
   |      /  |    |
   |    AD   |    |
   |_________|____|________
              Y₁  Y₂      Real output

Key elements:

• LRAS shifts RIGHT: represents an increase in the economy's productive potential
• When LRAS shifts right (without AD changing): real output rises from Y₁ to Y₂, price level may fall slightly from P₁ to P₂ (supply-side reduces inflationary pressure)
• Both actual AND potential growth shown: non-inflationary growth possible only with LRAS shift

Written reference sentence: "As the diagram shows, the rightward shift of LRAS from LRAS₁ to LRAS₂ — caused by supply-side investment in human capital — raises full employment output from Y₁ to Y₂, enabling non-inflationary GDP growth as productive capacity expands to meet demand."

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#DIAGRAM 4 — OUTPUT GAP

When to use: Any question explicitly mentioning "output gap" or where the question requires showing actual vs potential output. Some 4-mark Draw questions directly specify output gap.

Structure — NEGATIVE output gap:

Price
level          LRAS
   |            |
   |            |
P₁ |......./...|    <- equilibrium below potential
   |      /    |
   |    AD     |
   |___________|____
          Ye  Yfe    Real output
              ←→
           Negative
           output gap

• Ye = actual output (AD/SRAS equilibrium) — label and dotted lines to both axes
• Yfe = full employment/potential output (where LRAS is) — label on X-axis
• Negative output gap = distance between Ye and Yfe, shown as double-headed arrow

POSITIVE output gap:

• Ye is to the RIGHT of Yfe
• AD has shifted right of LRAS
• Generates demand-pull inflation

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#DIAGRAM 5 — PHILLIPS CURVE (Short-Run)

When to use: Questions on inflation-unemployment trade-off. Objective conflicts between inflation and unemployment. Phillips curve specifically mentioned.

Structure:

Inflation
rate (%)
   |
   |  \
I₂ |...\...
   |    \
I₁ |.....\...
   |      \
   |       \  SRPC
   |        \
   |_____________
       U₂ U₁    Unemployment rate (%)

Axis labels:

• Y-axis: Inflation rate (%)
• X-axis: Unemployment rate (%)

Key elements:

• SRPC: downward sloping — as unemployment falls, inflation rises
• Movement ALONG SRPC: a change in AD affects both simultaneously
• SHIFT of SRPC: caused by changes in inflation expectations (adaptive expectations) or supply shocks
• LRPC: vertical at NAIRU — in the long run, there is no trade-off (if expected)

Written reference sentence: "As the SRPC illustrates, a reduction in unemployment from U₁ to U₂ — achieved through expansionary demand-side policy — generates upward wage pressure, raising the inflation rate from I₁ to I₂. This short-run trade-off demonstrates why simultaneously achieving low inflation and low unemployment is constrained by the economy's position on the SRPC."

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#DIAGRAM 6 — J-CURVE

When to use: Questions on exchange rate depreciation and current account effects. Marshall-Lerner condition. Balance of payments questions.

Structure:

Current
account
balance
   |
   |                    ___
   |               ____/
   |          ____/
   0 |_________/
   |         /
   |        /
   |       / <- worsens initially
   |      /    (short-run J shape)
   |_____/
         Time →

Key explanation — WHY the J-curve has this shape:

The mechanism is a volume lag, not a cost-rise story. This is the most commonly misunderstood element of the J-curve.

Short run (the dip): Immediately after depreciation, import VOLUMES do not fall because pre-existing contracts lock in the quantity of imports. But the domestic currency price of those same imports rises immediately (depreciation raises import costs per unit). So the import BILL rises in the short run — worsening the current account.

Long run (the recovery): Over time, import volumes fall as price-elastic buyers switch to domestic alternatives. Export volumes rise as UK goods become cheaper for foreign buyers. Both volume adjustments push the current account toward improvement — the Marshall-Lerner recovery begins.

The condition for long-run improvement: PED(exports) + PED(imports) > 1 — the Marshall-Lerner condition. Only if this holds does the J-curve eventually rise above the original balance.

Common error to avoid: "Import COSTS rise initially" — technically the unit cost of each imported good rises. But the key mechanism is that import QUANTITIES don't fall immediately (contracts). The volume lag is the primary driver of the short-run deterioration.

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#DIAGRAM 7 — CIRCULAR FLOW OF INCOME

When to use: Questions on national income accounting, injections vs withdrawals, multiplier effects.

Structure:

Injections: I + G + X
              ↓
Firms ←——————————————————— Households
      ——————————————————→
              ↑
         Withdrawals: S + T + M

Key elements:

• Injections (I + G + X) add to the circular flow → expand national income
• Withdrawals/Leakages (S + T + M) remove from the circular flow → contract national income
• Equilibrium: Injections = Withdrawals (not when I=S, but when I+G+X = S+T+M)
• Multiplier: initial injection generates multiple rounds of income creation as spending circulates

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#DIAGRAM 8 — PRODUCTION POSSIBILITY FRONTIER (PPF)

When to use: Economic growth (outward shift), opportunity cost, productive efficiency, trade-off between objectives.

Structure:

Good B
  |
  |    PPF₁  PPF₂
  |   /         /
  |  /           /
  | /             /
  |/               /
  |_________________
                  Good A

Key elements:

• Points ON the PPF: productively efficient (all resources fully employed)
• Points INSIDE the PPF: productively inefficient (unemployment, spare capacity)
• Points OUTSIDE PPF₁ but ON PPF₂: only achievable after outward shift (economic growth)
• OUTWARD SHIFT of PPF: actual and potential growth — supply-side improvement

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#QUICK-REFERENCE DIAGRAM SELECTOR

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