Market Mechanics Lab

Supply, demand, taxes, subsidies, and gains from trade.

Predict first: what happens to prices, trade, and total surplus?

100%
Demand / buyer surplusSupply / seller surplusTax revenueDeadweight loss
Value and cost at a quantityMove along the curves, not between curves.

Demand |εd|
Supply εs
These elasticities use each curve's own price at the selected quantity. Off equilibrium, those prices differ.

Calculations

Who bears the tax or receives the subsidy?

The less responsive side bears more of a tax and receives more of a subsidy. Elasticities are evaluated at the unregulated equilibrium.

Buyer share = εs / (εs + |εd|)

Exact for these linear curves while trade remains positive. For nonlinear markets, the elasticity formula is generally a small-tax approximation. At zero trade, per-unit incidence is not uniquely identified.

What the areas mean

Consumer surplus: How much better off buyers are because they pay less than the units are worth to them.

Producer surplus: How much better off sellers are because they receive more than the cost of providing those units. Fixed costs are not deducted here.

Total surplus: The value created by trade after subtracting production costs. With a policy, include government revenue or subtract government spending.

Deadweight loss: Value lost because beneficial trades do not happen, or because extra units cost more to produce than they are worth.

Before and after the policy

MeasureNo policyCurrentChange

This comparison holds the current curves fixed. “Capture baseline” separately preserves earlier curves on the graph.