well this diagram starts with a free trade base we covered the free trade diagram in a previous video um but the idea is that world suppliers have the comparative advantage not domestic producers in this case and that's why their price is low at PW at that low price domestic Supply is only at q1 domestic demand is at Q2 and import are the difference between q1 and Q2 but now let's say the government of this country is not happy with the level of imports being so high they want to reduce that level so they impose a tariff as a protectionist measure remember a tariff is a tax on Imports that increases the price of imports and that's where we're going to start with this diagram increasing the price from PW to let's just call it PW plus t a higher price at that higher price the new world supply curve can be derived we draw it horizontal at that higher price let's call it s w plus T and as always in economics the vertical distance between the two Supply curves is the value of the tax per unit so in this case that is the value of the Tariff per unit at that higher price we can see that there is an increase in domestic Supply from q1 to Q3 technically that is an expansion or an extension of domestic Supply and it's natural to understand why because now the higher cost of production for domestic firms that don't have a comparative advantage can be partly covered by that higher price so this higher price could be attracted in new firms domestically into the market or it could just be attracting existing firms to increase their productive capacity to produce more attracted by the higher price so that's the expansion of domestic Supply the increase of domestic Supply but naturally consumers domestically do not like the higher price there is a contraction of domestic demand to now Q4 there it is but those last two effects have squeezed Imports right so the falling domestic demand the increase in domestic suppli is meant that Imports are now only Q3 Q4 compared to q1 Q2 prior in fact we can add a lot of these impacts to the writing on the left hand side here so what's happened with price well a tariff is increased price isn't it from PW to PW plus T domestic supply has increased or expanded or extended q1 to Q3 domestic demand has fallen it's contracted from Q2 to Q4 and imports have been squeezed from q1 Q2 to now Q3 Q4 and that is the point of a tariff to reduce Imports what we can now do is dissect this diagram into more detail add some areas to it like we did with the free trade diagram and then fill out the rest of the impacts here so now having dissected this diagram into even more detail with these areas we can work out what's going on with these things let's start with domestic producer to revenue remember the equation for revenue is just price time quantity P * Q so before the Tariff domestic producers were producing q1 at the price of PW so PW * q1 was area a that was the domestic producer Revenue but now with the Tariff the price has gone up to PW plus T and they're now supplying producing Q3 multiply the two and we get a much bigger area of Revenue abfg it's an increase in domestic producer Revenue so it's increase from a to now A plus b plus e plus f plus G and again that's the point of a tariff right to help domestic producers out increase their revenue increase their output a tariff is a tax on import so it's going to generate government revenue to work out the government revenue you take the Tariff per unit which we know is the vertical distance between the two Supply curves and we multiply by the Imports which in this case is Q3 to Q4 doing that gives us area 8 foreign producer Revenue well before the Tariff foreign producers were selling in q1 Q2 units at the price of PW so their revenue is B plus C plus d whereas now with the Tariff they're only selling Q3 Q4 units coming into this country at the price of PW plus T but area H is going to the government so it's not H and C their revenue it's only C that's a big drop in foreign producer Revenue so it's Fallen from B plus C plus d to now only C again that is the point of a tariff to harm foreign producers and give a lot more benefit to domestic producers we see that very clearly here by raising prices though tariffs will reduce consumer surplus to find consumer surplus remember it's the area beneath the demand C and above the price line so before the Tariff this was the consumer surplus this triangle here follow the pen all all the way down across and up there that was the Triangle of consumer surplus but now with a higher price the triangle is only here there to here up there so what we can see is efgh hni is the total loss of consumer surplus so e plus f plus G plus h plus I not good for consumers consumers are getting a hit but even worse there is a dead weight loss of consumer surplus that word dead way in economics remember means unrecovered and that is area I here if it's only area I it means EF g& have been recovered in some way we're going to see in a second that enf will be a gain of domestic producer Surplus G is a gain of domestic producer revenue and H is government revenue I used to be consumer surplus now it's nothing at all it's nothing because those units are not being produced anymore and economists hate dead weight losses benefits are were there which are now gone completely because of a government intervention we don't like and that is a dead weight loss there is a gain of domestic producer Surplus so to find producer Surplus it's the area above the supply curve beneath the price line so before the Tariff it was only this teeny triangle here can you see that little bit there whereas now with the Tariff producer Surplus is this triangle here all the way to there down and back up again so andf is the total gain e plus F of producer Surplus but there is horribly some allocative inefficiency here uh to find the allocative inefficiency we look at the extra units that are being produced by domestic firms that's q1 to Q3 they're only being produced because a tariff has artificially increased the world price which has attracted firms domestically to produce more output but remember that Supply Curves in economics are marginal cost curves so comparing the domestic supply curve and the world supply curve for units q1 to Q3 we can see that the domestic supply curve is always higher than the world Supply code yes the cost of production for domestic supplies is higher than World supplies because they don't have the comparative advantage right they're not the true lowest cost producer their cost of production are higher the difference in the supply curves makes that very clear they need more resources to produce these units because they don't have a comparative advantage that's resources is going to the wrong producers area G showcases in total the extra cost involved uh as a result of these units being produced by the wrong producers so area G is the inefficient resource transfer the higher cost of production as a result of this Distortion of comparative advantage so there you have it guys the types of protectionism yes but there really powerful great tariff diagram but of course you must stay tuned for the next video where where we apply this diagram to reasons for protectionism but also to evaluate protectionist policies you're massive Ecom plus style fans I trust you to stay tuned for that video can't wait to see you there guys thanks for watching this one [Music]