Surplus and Policy Lab

One market, every policy the exam asks about. Pick a price ceiling, a price floor, a tax, a subsidy, a world price or a tariff and move it: the graph redraws, each area is colored (consumer surplus, producer surplus, revenue or cost, deadweight loss) and its size is worked out in dollars beside it. Tap an area on the graph to see what it is and why it is there.

What the model is

A teaching model drawn the way the exam scores graphs: straight demand and supply curves, every area a triangle, rectangle or trapezoid you can compute by hand.

• Consumer surplus lies under demand and above the price buyers pay; producer surplus above supply and below the price sellers keep; both stop at the quantity actually traded.
• A binding price ceiling sits below the equilibrium price (a shortage); a binding floor above it (a surplus). The smaller of quantity demanded and quantity supplied is traded.
• A per-unit tax on sellers shifts supply up by the tax. Revenue is the tax times the quantity after the tax; the deadweight loss is the triangle of trades it stops. The less elastic side bears more of the tax.
• A per-unit subsidy shifts supply down. Its cost is the whole rectangle between the two prices out to the new, larger quantity; the deadweight loss is the triangle beyond the equilibrium quantity.
• A world price below the domestic price brings imports; a tariff raises the domestic price, cuts imports, earns revenue on the imports left and adds two deadweight loss triangles.

Test yourself gives problems on each policy: shade the area on the graph, then compute it, each step checked on its own.

Notes for this topic: The Effects of Government Intervention in Markets