4.2 Diagrams Flashcards
Tariff Diagram - Analysis
A tariff, a tax on imports, will shift the world supply curve upwards from Sw to Sw+T raising the market price from Pw to Pw+T. Due to the higher price, domestic demand will contract from Q2 to Q4 and domestic production will extend from Q1 to Q3 increasing domestic producer revenue from a to a+b+e+f+g. Consumers paying a higher price lose out with a deadweight welfare loss of consumer surplus, area i. The excess demand that remains will be satisfied by imports from foreign producers Q3Q4 but because they must pay the tariff, their revenue falls from b+c+d to c with the governments receiving tax revenue h. The number of imports decreases from Q1Q2 to Q3Q4 units but this comes with allocative inefficiency of domestic producers producing units at a higher cost than foreign producers indicated by area g.
Tariff Diagram - Labelling
Price: Increases from Pw to Pw+T
Domestic Production: Increases from Q1 to Q3
Domestic Demand: Decreases from Q2 to 04
Imports: Decrease from Q102 units to Q304 units
Domestic Producer Revenue: Increases from A to A+B+E+F+G
Foreign Producer Revenue: Decreases from B+C+D to C
Government Revenue: H
Consumer Surplus: Decreases by E+F+G+H+I, Deadweight Welfare Loss of Area I
Producer Surplus: Increases by E+F
Resource Allocation: Allocative Inefficiency of Area G
Quota Diagram - Analysis
If an import quota has been imposed of Q103 units, domestic producers will produce 01 units at Pw with foreign producers supplying part of the excess demand up until the quota of 0103 units. The excess demand has not been fully satisfied at Pw; Q302 excess demand remains putting pressure on domestic suppliers causing the price to rise to ration the excess demand. With no more imports allowed into the country, the higher price incentivises more domestic firms to enter the market which shifts the domestic supply curve to the right from Sd to Sd+quota at the quota quantity. The price settles where the new supply curve meets demand at quota where no excess demand remains. This means that domestic suppliers supply Q1 and Q3Q4 units at a higher price increasing their revenue from a to a+e+c+h+i. Foreign producers now only supply their quota at quota changing their revenue from b+c+d to b+f+g. Consumers suffer from higher prices causing a deadweight welfare loss of consumer surplus of area j. The number of imports decreases from Q102 to Q1Q3 units but with allocative inefficiency of domestic producers producing units at a higher cost than foreign producers indicated by area i.
Quota Diagram - Labelling
Price: Increases from Pw to Pquota
Domestic Production: Increases from Q1 to Q1+Q3Q4
Domestic Demand: Decreases from Q2 to Q4
Imports: Decrease from Q1Q2 units to Q1Q3 units
Domestic Producer Revenue: Increases from A to A+E+C+H+I
Foreign Producer Revenue: Unsure if B+C+D to B+F+G is greater or smaller
Consumer Surplus: Decreases by E+F+G+H+|+J, Deadweight Welfare Loss of Area J
Resource Allocation: Allocative Inefficiency of Area I
Domestic Subsidy - Analysis
A subsidy will reduce the costs of production for domestic firms shifting the domestic supply curve downwards from Sd to Sd+sub. The market price remains at Pw however as the value of the subsidy is not enough for domestic producers to outcompete world suppliers and charge a lower price therefore domestic demand remains at Q2. Domestic production now increases to Q3, as they receive the subsidy, receiving a price equivalent to Pw+sub which increases their revenue from a to a+b+de+f. This does come at a cost to the government who must pay the subsidy equal to dref. Foreign producers now supply the excess demand Q3Q2 units with their revenue falling from bee to c. The number of imports decreases from Q1Q2 to Q3Q2 units but this comes with allocative inefficiency of domestic producers producing units at a higher cost than foreign producers indicated by area f. Whilst consumer surplus does not decrease as the price in the market remains at Pw, consumers are likely to suffer from higher taxes in the future to fund this subsidy, in that sense subsidies involve an opportunity cost.
