The Tariff Diagram

So, tariffs are taxes paid on imports. And tariffs are sometimes also known as:

Tariffs are sometimes also known as import or custom duties.

If a country introduces a tariff, the tariff will affect prices, supply and demand! Let’s look at a supply and demand diagram to work out how.

Here we have a supply and demand diagram, showing the domestic supply of American washing machines, and the domestic demand for washing machines in America – so what’s supplied by domestic American firms, and what’s demanded by domestic American consumers.

Which gives us an equilibrium at…

If America supplied all its own washing machines, our equilibrium would be at a price of $500 – and a quantity of 100 million washing machines would be bought and sold.

However, American firms aren’t the only firms to supply washing machines – the rest of the world also supplies washing machines.

So we need another supply curve – a world supply curve – to show the supply of washing machines from other foreign countries!

Our world supply curve looks like…this!

To keep things simple, we assume the world supply curve is a flat, horizontal line. Which means world supply is…

We assume the world supply curve is always a flat, horizontal line. That means that, world supply is perfectly elastic.

And so suppliers from the rest of the world sell their washing machines for…

Foreign suppliers from the rest of the world will sell their washing machines for $250 – much cheaper than the $500 price we’d get if only domestic American firms supplied. And that’s because other foreign countries can produce washing machines at lower costs.

So, if our world suppliers sell washing machines at $250, how many washing machines will America demand?

We assume the world supply curve is always a flat, horizontal line. That means that, world supply is perfectly elastic.

And so

From $250, if we slide across to our domestic demand curve, we see that American consumers will consume 150 million washing machines!

But at $250, how many washing machines will Americans firms supply?

But if we slide across to our domestic supply curve, the quantity supplied by American firms is only 50million.

So American consumers will import the 100million in between from foreign firms! So the quantity imported is this 100 million gap in between.