Tariff explanation with Graphs

1. Market for Plywood
Price of
Plywood
Quantity of Plywood
Pe Domestic = $10.00
Supply*
Demand*
Qe
Qs=Qd
1,000
“A”
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A CLOSED ECONOMY that does not trade with
foreigners is said To be in a State of Autarky.
In this state the Domestic Market Price is Pe= $10.00
and the Domestic Market Quantity is “Qe = 1,000”

2. Market for Plywood
Price of
Plywood
Quantity of Plywood
Pe Domestic = $10.00
Supply*
Demand*
Qe
Qs=Qd
1,000
“A”
CS
PS
The boxes show the Areas of
Consumer Surplus (CS) and
Producer Surplus (PS) when a
Market is in Equilibrium.
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3. Market for Plywood
Price of
Plywood
Pe Domestic = $10.00
Supply*
Demand*
Qe
Qs=Qd
1,000
P1 World = $5.00
Qs Domestic
500
Qd Domestic
1,500
Quantity of Plywood
“A”
CS
PS
“B” “C”
Assume the Price of Imported
Plywood is $5.00 (“P1 World”)
At $5.00 the Domestic Quantity Supplied
DECREASES from 1,000 to 500 (Law of
Supply) Point “B”.
At $5.00 the Domestic Quantity Demanded
INCREASES from 1,000 to 1,500 (Law of
Demand) Point “C”
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4. Market for Plywood
Price of
Plywood
Pe Domestic = $10.00
Supply*
Demand*
Qe
Qs=Qd
1,000
P1 World = $5.00
Qs Domestic
500
Qd Domestic
1,500
Quantity of Plywood
IMPORTS
1,000
“A”
CS
PS
“B” “C”
The Difference between
Domestic Quantity Supplied
(500)and Domestic Quantity
Demanded (1,500) will be made
up with IMPORTS of 1,000.
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5. Market for Plywood
Price of
Plywood
Pe Domestic = $10.00
Supply*
Demand*
Qe
Qs=Qd
1,000
P1 World = $5.00
Qs Domestic
500
Qd Domestic
1,500
Quantity of Plywood
“A”
“B” “C”
CS
PS
CS CS
IMPORTS
1,000
CS
Additional Consumer Surplus
as a result of opening up to
trade are the areas designated
by: CS
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6. Market for Plywood
Price of
Plywood
Pe Domestic = $10.00
Supply*
Demand*
Qe
Qs=Qd
1,000
P1 World = $5.00
Qs Domestic
500
Qd Domestic
1,500
Quantity of Plywood
“A”
“B” “C”
CS
PS
IMPORTS
1,000
P2 W +T = $8.00
“E”“F”
Assume Domestic producers
Lobby and get a Tariff of $3.00
imposed on Plywood. This will
Increase the price from $5.00 to
$8.00---”P2 w+ T”. Note the price
does not return to $10.00. Don’t
want to be too greedy!
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7. Market for Plywood
Price of
Plywood
Pe Domestic = $10.00
Supply*
Demand*
Qe
Qs=Qd
1,000
P1 World = $5.00
Qs Domestic
500
Qd Domestic
1,500
Quantity of Plywood
“A”
“B” “C”
CS
PS
CS
IMPORTS
1,000
P2 W +T = $8.00
“E”“F”
Because the Tariff caused a change In PRICE,
then the Market will move Along its
respective curves.
Quantity Supplied will increase from “B” to
“F” (Law of Supply)
Quantity Demanded will decrease From “C”
to “E” (Law of Demand)
CS CS
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8. Market for Plywood
Price of
Plywood
Pe Domestic = $10.00
Supply*
Demand*
Qe
Qs=Qd
1,000
P1 World = $5.00
Qs Domestic
500
Qd Domestic
1,500
Quantity of Plywood
“A”
“B” “C”
CS
PS
CS CS CS
IMPORTS
500
P2 W +T = $8.00
“E”“F”
Qs Domestic
750
Qd Domestic
1,250
Two things happen here:
(1) Imports DECREASE to 500
(2) We lose areas of Consumer Surplus
(The Black Boxes with (?))
What happens to those areas of CS is
A BIG DEAL!!
The next slides tell that story.
???
? ?
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9. Market for Plywood
Price of
Plywood
Pe Domestic = $10.00
Supply*
Demand*
Qe
Qs=Qd
1,000
P1 World = $5.00
Qs Domestic
500
Qd Domestic
1,500
Quantity of Plywood
“A”
“B” “C”
CS
PS
CS CS CS
IMPORTS
500
P2 W +T = $8.00
“E”“F”
Qs Domestic
750
Qd Domestic
1,250
PS
There is an INCREASE in Producer
Surplus as domestic producers
Increase their Quantity Supplied,
Moving ALONG the Supply*
From Point “B” to “F”.
PS
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10. Market for Plywood
Price of
Plywood
Pe Domestic = $10.00
Supply*
Demand*
Qe
Qs=Qd
1,000
P1 World = $5.00
Qs Domestic
500
Qd Domestic
1,500
Quantity of Plywood
“A”
“B” “C”
CS
PS
CS CS CS
IMPORTS
500
P2 W +T = $8.00
“E”“F”
Qs Domestic
750
Qd Domestic
1,250
PS “DWL”“DWL”
This area (a triangle) is DEAD WEIGHT LOSS
to Consumers as a result of the Tariff.
Prior to the tariff, Consumers “enjoyed”
an additional 250 pieces of Plywood
at the lower price of $5.00. They can
No longer consume plywood
along the Demand Curve between
Point “E” and “C”.

11. Market for Plywood
Price of
Plywood
Pe Domestic = $10.00
Supply*
Demand*
Qe
Qs=Qd
1,000
P1 World = $5.00
Qs Domestic
500
Qd Domestic
1,500
Quantity of Plywood
“A”
“B” “C”
CS
PS
CS CS CS
IMPORTS
500
P2 W +T = $8.00
“E”“F”
Qs Domestic
750
Qd Domestic
1,250
PS “DWL”“DWL”
This area (a triangle) is DEAD WEIGHT LOSS
to SOCIETY as a result of the Tariff.
Scarce societal resources were used to produce
an additional 250 units of Plywood ONLY
because of the imposition of the Tariff.
In other words, domestic resources were employed
at a higher cost to produce a quantity of a good that
could have been imported for a lower price.
OPPORTUNITY COST!

12. Market for Plywood
Price of
Plywood
Pe Domestic = $10.00
Supply*
Demand*
Qe
Qs=Qd
1,000
P1 World = $5.00
Qs Domestic
500
Qd Domestic
1,500
Quantity of Plywood
“A”
“B” “C”
CS
PS
CS CS CS
IMPORTS
500
P2 W +T = $8.00
“E”“F”
Qs Domestic
750
Qd Domestic
1,250
PS “DWL”“DWL”
These 2 Areas (Squares) represent the area of
Tariff Revenue to the Government.
If you take the tariff of $3.00 and multiply it buy the
Amount of Imports (500) you will get $1,500.
T.R T.R