<p>The standard supply and demand model is a <em>model</em>. Models by definition are distorted version of reality not reality by themselves. The model also ignores transportation costs and other real life issues as well.</p>
<p>However, think about the main message of the model that tariffs decrease overall welfare. Assuming that consumers randomly decide to either consume imported product or domestic product would indeed affect possible size of government tax revenue but not in any way change the main outcome that overall welfare has decreased as when you calculate area of all losses even in corner case where everything is imported taking into account higher government revenue there would still be net welfare loss. Hence adding this bit of 'realism' (I am using '' as randomly picking product is still not realistic either) would complicate math, make your exams more difficult and would not teach you much more. The point of every model is to be as simple as possible in order to be general but still complex enough to allow us to analyze the issue of interest in a way that exposes the underlying economic mechanism.</p>
<p>Of course, different people can disagree about where the dividing line between being too simple to be useful is - that’s an opinion based question, but it’s common for undergraduate models to be oversimplification. In undergraduate physics you will be constantly assuming perfect vacuum, massless points, zero friction etc. all of which is unrealistic in order to gain enough knowledge to understand more nuanced models. All fields use this method of ‘teaching beginners by oversimplified models’ for better or worse.</p>
<p>Later in your academic carrier at PhD or Master level you will encounter far more complex and also more realistic trade models. If you want to see them before you get there you can read Advanced International Trade by Feenstra or Applied International Trade by Bowen, Hollander or Viaene. Or published papers on these topics. Some of those models deal with geography, monopolistic competition and other issues that address international trade in more nuanced way than a Econ 101 could. For the sort of question you are asking here some industrial organization (IO) model with explicitly modeled competition would be more appropriate than assuming 50/50 split for example.</p>
<p>PS: Your last picture is actually not correct. The Government revenue, in this model, will always be a rectangle since it is by definition <span class="math-container">$Q_{import}*t$</span>.  A correct way of visualizing government revenue if you assume half of the quantity would be imported no matter what would be this:</p>
<p><a href="https://i.sstatic.net/o3J0Mm.jpg" rel="nofollow noreferrer"><img src="https://i.sstatic.net/o3J0Mm.jpg" alt="enter image description here" /></a></p>

CC BY-SA 4.0
2020-09-01T15:29:25.347Z
1) So am I understanding this correctly that in models taught in undergrad are assuming imports go to zero when domestic supply is possible? 2) if 50/50 split happens then imports will start from Q 0, on which govt will make revenue too.  so shouldn't green box show that. at Q 100 there should be govt revenue for Q 50, Q 20 is govt revenue is  Q 10.
Muhammad Umer
CC BY-SA 4.0
2020-09-01T15:33:33.630Z
@MuhammadUmer 1. They assume that imports start when domestic supply is exhausted. 2. No in 50/50 imports would end up being half of all Q it does not matter if you slice the total rectangle that’s applied to half Q into smaller rectangles - you can always just group all imports together Q in equilibrium will be some value let’s say 100 if 50 percent of 100Q is imports it matters absolutely not in what order those Q arrived or were bought. Even if you would wanna distinguish it you would never get that inverted trapezoid you would just get cut rectangle with a slice whenever the import appears
1muflon1
CC BY-SA 4.0
2020-09-01T15:35:24.230Z
Thanks make sense, Reading graph accurately is actually very hard thing to do.
Muhammad Umer
CC BY-SA 4.0
2020-09-01T15:36:40.750Z
putting those slices together is completely sensible. Using your example of 50 imports the government revenue would have to be 50*tarrif which is exactly what my green rectangle does. Extending it all the way would be representing 100*tariff which would be wrong and drawing that extra little trapezoid makes no sense whatsoever. That would not even have any meaningful interpretation in your picture.
1muflon1
CC BY-SA 4.0
2020-09-01T15:42:05.803Z
i think i was reading it mathematically i.e. as a function of quantity. so as quantity increases how does the import and domestic supply changes. Which it's not. It's a chart that shows things as is, more like a pie chart than a chart of function's input and output. Pie chart shows area in a static way, similarly that 50/50 small trapezoid area can be merged into bigger one and made into a rectangle. At least from what I got, correct?
Muhammad Umer
CC BY-SA 4.0
2020-09-01T15:45:05.570Z
@MuhammadUmer it actually is a function but consider function Q=F+M where F is domestic prod. and M is an import. Does it make any sense using such linear function to say that if F=50 and M=50 that some of that F or M occurred first? This is static not dynamic function (time plays no role) in such static environment everything happens at once. Hence the X axis can be just split into red part F plus blue part M. It’s like adding line segments. Sure you could slice it in any arbitrary way but putting all imports next to each other is most convenient and area of those parts will always be Q*t
1muflon1
CC BY-SA 4.0
2020-09-01T15:53:58.153Z
Ok, regardless of how the chart looks. Govt rev = # things imported x Tariff. # things imported = everything after local supply to demand curve + 50% of Q supplied by domestic suppliers. So  `R = ( (Q2 - Q1) + ((Q1-Q0)/2) ) * T`
Muhammad Umer
CC BY-SA 4.0
2020-09-01T15:58:08.037Z
@MuhammadUmer no assuming Q_0 and Q_1 are points defining the red segment and Q_2 and Q_1 blue segment, the government revenue $R$ would be $R=(Q_2-Q_1)*t$. Tariff only applies to foreign goods not to domestic ones.
1muflon1
CC BY-SA 4.0
2020-09-01T16:07:00.500Z
On $10 quantity demanded is say 100. Up to 60Q can be filled by domestic suppliers, and rest of 40Q IS filled by imports. But given imports are not only consumed once domestic supply has been exhausted but available from the get go and 50/50 chance of being favored over domestic products. Then total imports will be = 40Q + 60Q/2 = 70Q. 40Q imports are given domestic suppliers can't touch this. So competition happens 60Q.  SO govt Revenue should be  = T * (40Q + 60Q/2).. correct?
Muhammad Umer
CC BY-SA 4.0
2020-09-01T16:10:41.173Z
@MuhammadUmer oh you want to assume that the probably 50/50 applies only to the part of supply produced by domestic suppliers. In that case yes, I thought you wanna apply it to whole supply. You should then be more specific because saying that probability of consumer to buy either domestically or import is 50/50 would implicitly mean you wanna apply it on total Q
1muflon1
CC BY-SA 4.0
2020-09-01T16:49:01.843Z
hmm... Good point, I've to think about this. Say there is 10 demand and consumer can pick either imported or domestic 50/50. And local max supply is 6 and imported max is 10 then. After 10 purchases, it'd be 5:5. But if domestic max was 4 and imported max was 10 then it'd be 4:6
Muhammad Umer
CC BY-SA 4.0
2020-09-01T16:50:47.343Z
@MuhammadUmer yes you could do that in that way as well, I assumed that you just wanted to consider supply as whole. However, you should also note that its not that much more realistic - you still assume that there are infinite possible imports.
1muflon1
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2020-09-01T17:00:04.783Z
yea, true. I'm thinking small island vs entire world.
Muhammad Umer
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2020-09-01T18:20:22.330Z
@1muflon1 Sorry, but I think your answer is completely incorrect. See my much simpler answer.
Criticize SE actions means ban
CC BY-SA 4.0
2020-09-01T18:21:57.667Z
@user253751 can you be specific and say what you think is wrong with it instead of just stating it’s completely incorrect? I don’t see anything in your answer that would be inconsistent with what I have written here.
1muflon1
CC BY-SA 4.0
2020-09-01T18:33:08.843Z
@1muflon1 The answer to the asker's question is simply that they have misinterpreted the graph. Their confusion is not because the model is over-simplified and only conveys the main message.
Criticize SE actions means ban
CC BY-SA 4.0
2020-09-01T18:35:52.763Z
@user253751 as I understand the OP question is why country will first fully exhaust its own supply before importing. That’s not oblivious as you say in your answer and it is oversimplified assumption because empirically countries do not necessarily always produce at full capacity and even if they do due to monopolistic competition a country can be exporting and importing the same product at the same time
1muflon1
CC BY-SA 4.0
2020-09-01T18:39:00.610Z
@1muflon1 It's not exhausted though. If it was exhausted, the supply line would be flat. It's going to exhaust all the lower-price stuff before it buys the higher-price stuff, and in this graph, the lower-price stuff is domestic. There is also high-price domestic stuff, but that doesn't get bought.
Criticize SE actions means ban
CC BY-SA 4.0
2020-09-01T18:43:19.763Z
@user253751 but the quantity is always bought at an equilibrium price it’s not like the first unit of Q is bought along the price when supply is 1. At a given equilibrium price where home produced good price and foreign good price is fully equal and assuming the foreign supply has no limit it is valid to ask why we even produce anything at home at all.
1muflon1
CC BY-SA 4.0
2020-09-01T18:54:32.820Z
@user253751 also just to add to my previous comment of course saying that country will produce up to its production potential is completely reasonable if you assume that in the background all markets clear and perfect competition etc. but that is not *explicitly* modeled by supply and demand so it is in a sense oversimplification (not even mentioning that empirically many markets are not perfect, in the short run they might not immediately clear etc.)
1muflon1
CC BY-SA 4.0
2020-09-01T14:54:20.677Z
2020-09-01T22:02:59.460Z
2020-09-01T22:02:59.460Z
1muflon1
<p>In this graph, the line going up, next to the green area, shows how many domestic suppliers are willing to produce the good for a certain price.</p>
<p>The line going down, next to the blue area, shows how many domestic consumers are willing to consume the good for a certain price.</p>
<p>The part of the domestic consumption which isn't produced domestically is imported. Because where else would those goods come from?</p>
<p>Now, you are asking, &quot;Why does the domestic production line only include domestic producers? How do we know the domestic production isn't partly made up of domestic producers and partly of importers?&quot;. The answer, I hope, is obvious.</p>
<p>Also remember this graph is comparing different price levels. The &quot;tariff&quot; line is how much it costs to import the good, including the tariff. No imports will happen below that line, because they'd lose money.</p>
<p>In this model, it's assumed that the international economy is much bigger than the domestic one under consideration. Hence, importing the good does not noticeably affect the import price.</p>

CC BY-SA 4.0
2020-09-01T17:29:46.977Z
2020-09-01T18:39:55.377Z
2020-09-01T18:39:55.377Z
Criticize SE actions means ban
<p>First Review What I do understand,</p>
<p>The demand and supply chart shows once imports are allowed...</p>
<p><a href="https://i.sstatic.net/YDYxd.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/YDYxd.png" alt="enter image description here" /></a></p>
<p>Tariff is added on imports resulting in loss of consumer <strong>surplus</strong> and increase in supplier surplus.</p>
<p><a href="https://i.sstatic.net/oukiO.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/oukiO.png" alt="enter image description here" /></a></p>
<p>I get everything up until to this point. However...</p>
<p><a href="https://i.sstatic.net/YL0bi.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/YL0bi.png" alt="enter image description here" /></a></p>
<p>Is this wrong? But this traditional textbook version. Green represents both, width represents imported quantity and area represents govt surplus. This is not what happens in real life. If there are two products both priced $10, I'd buy either one all things being equal regardless of what company or country it was made in. For most products I'm not going to care whether they were imported or domestically made. YET, this graph very clearly assumes import will stop where local suppliers are able to provide.</p>
<p>Correct version should be like this:</p>
<p><a href="https://i.sstatic.net/ChoPr.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/ChoPr.png" alt="enter image description here" /></a></p>
<p>or maybe like this:</p>
<p><a href="https://i.sstatic.net/iC8zZ.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/iC8zZ.png" alt="enter image description here" /></a></p>

CC BY-SA 4.0
2020-09-01T17:27:00.473Z
I think by definition the line going up shows the amount of domestic production. It does not make sense to include imports in that line because if that line was total production/imports, the whole graph doesn't make sense. (how could consumption be greater than production?)
Criticize SE actions means ban
<microeconomics><supply-and-demand><tariffs>
In demand and supply chart, why is it assumed that import will only happen if domestic suppliers are unable to supply?
Muhammad Umer
# In demand and supply chart, why is it assumed that import will only happen if domestic suppliers are unable to supply?

(Asked by: username_0 on 2020-09-01)

First Review What I do understand,

The demand and supply chart shows once imports are allowed...

[![enter image description here](https://i.sstatic.net/YDYxd.png)](https://i.sstatic.net/YDYxd.png)

Tariff is added on imports resulting in loss of consumer **surplus** and increase in supplier surplus.

[![enter image description here](https://i.sstatic.net/oukiO.png)](https://i.sstatic.net/oukiO.png)

I get everything up until to this point. However...

[![enter image description here](https://i.sstatic.net/YL0bi.png)](https://i.sstatic.net/YL0bi.png)

Is this wrong? But this traditional textbook version. Green represents both, width represents imported quantity and area represents govt surplus. This is not what happens in real life. If there are two products both priced $10, I'd buy either one all things being equal regardless of what company or country it was made in. For most products I'm not going to care whether they were imported or domestically made. YET, this graph very clearly assumes import will stop where local suppliers are able to provide.

Correct version should be like this:

[![enter image description here](https://i.sstatic.net/ChoPr.png)](https://i.sstatic.net/ChoPr.png)

or maybe like this:

[![enter image description here](https://i.sstatic.net/iC8zZ.png)](https://i.sstatic.net/iC8zZ.png)

**Tags:** microeconomics, supply-and-demand, tariffs

> **Comments:**
> **username_1**: I think by definition the line going up shows the amount of domestic production. It does not make sense to include imports in that line because if that line was total production/imports, the whole graph doesn't make sense. (how could consumption be greater than production?)  

---

## 2 answers

### Answer by username_2 on 2020-09-01. Score: 2 | Accepted answer

The standard supply and demand model is a *model*. Models by definition are distorted version of reality not reality by themselves. The model also ignores transportation costs and other real life issues as well.

However, think about the main message of the model that tariffs decrease overall welfare. Assuming that consumers randomly decide to either consume imported product or domestic product would indeed affect possible size of government tax revenue but not in any way change the main outcome that overall welfare has decreased as when you calculate area of all losses even in corner case where everything is imported taking into account higher government revenue there would still be net welfare loss. Hence adding this bit of 'realism' (I am using '' as randomly picking product is still not realistic either) would complicate math, make your exams more difficult and would not teach you much more. The point of every model is to be as simple as possible in order to be general but still complex enough to allow us to analyze the issue of interest in a way that exposes the underlying economic mechanism.

Of course, different people can disagree about where the dividing line between being too simple to be useful is - that’s an opinion based question, but it’s common for undergraduate models to be oversimplification. In undergraduate physics you will be constantly assuming perfect vacuum, massless points, zero friction etc. all of which is unrealistic in order to gain enough knowledge to understand more nuanced models. All fields use this method of ‘teaching beginners by oversimplified models’ for better or worse.

Later in your academic carrier at PhD or Master level you will encounter far more complex and also more realistic trade models. If you want to see them before you get there you can read Advanced International Trade by Feenstra or Applied International Trade by Bowen, Hollander or Viaene. Or published papers on these topics. Some of those models deal with geography, monopolistic competition and other issues that address international trade in more nuanced way than a Econ 101 could. For the sort of question you are asking here some industrial organization (IO) model with explicitly modeled competition would be more appropriate than assuming 50/50 split for example.

PS: Your last picture is actually not correct. The Government revenue, in this model, will always be a rectangle since it is by definition $Q\_{import}\*t$. A correct way of visualizing government revenue if you assume half of the quantity would be imported no matter what would be this:

[![enter image description here](https://i.sstatic.net/o3J0Mm.jpg)](https://i.sstatic.net/o3J0Mm.jpg)

> **Comments:**
> **username_0**: 1) So am I understanding this correctly that in models taught in undergrad are assuming imports go to zero when domestic supply is possible? 2) if 50/50 split happens then imports will start from Q 0, on which govt will make revenue too.  so shouldn't green box show that. at Q 100 there should be govt revenue for Q 50, Q 20 is govt revenue is  Q 10.  
> **username_2**: @username_0 1. They assume that imports start when domestic supply is exhausted. 2. No in 50/50 imports would end up being half of all Q it does not matter if you slice the total rectangle that’s applied to half Q into smaller rectangles - you can always just group all imports together Q in equilibrium will be some value let’s say 100 if 50 percent of 100Q is imports it matters absolutely not in what order those Q arrived or were bought. Even if you would wanna distinguish it you would never get that inverted trapezoid you would just get cut rectangle with a slice whenever the import appears  
> **username_0**: Thanks make sense, Reading graph accurately is actually very hard thing to do.  
> **username_2**: putting those slices together is completely sensible. Using your example of 50 imports the government revenue would have to be 50*tarrif which is exactly what my green rectangle does. Extending it all the way would be representing 100*tariff which would be wrong and drawing that extra little trapezoid makes no sense whatsoever. That would not even have any meaningful interpretation in your picture.  
> **username_0**: i think i was reading it mathematically i.e. as a function of quantity. so as quantity increases how does the import and domestic supply changes. Which it's not. It's a chart that shows things as is, more like a pie chart than a chart of function's input and output. Pie chart shows area in a static way, similarly that 50/50 small trapezoid area can be merged into bigger one and made into a rectangle. At least from what I got, correct?  
> **username_2**: @username_0 it actually is a function but consider function Q=F+M where F is domestic prod. and M is an import. Does it make any sense using such linear function to say that if F=50 and M=50 that some of that F or M occurred first? This is static not dynamic function (time plays no role) in such static environment everything happens at once. Hence the X axis can be just split into red part F plus blue part M. It’s like adding line segments. Sure you could slice it in any arbitrary way but putting all imports next to each other is most convenient and area of those parts will always be Q*t  
> **username_0**: Ok, regardless of how the chart looks. Govt rev = # things imported x Tariff. # things imported = everything after local supply to demand curve + 50% of Q supplied by domestic suppliers. So  `R = ( (Q2 - Q1) + ((Q1-Q0)/2) ) * T`  
> **username_2**: @username_0 no assuming Q_0 and Q_1 are points defining the red segment and Q_2 and Q_1 blue segment, the government revenue $R$ would be $R=(Q_2-Q_1)*t$. Tariff only applies to foreign goods not to domestic ones.  
> **username_0**: On $10 quantity demanded is say 100. Up to 60Q can be filled by domestic suppliers, and rest of 40Q IS filled by imports. But given imports are not only consumed once domestic supply has been exhausted but available from the get go and 50/50 chance of being favored over domestic products. Then total imports will be = 40Q + 60Q/2 = 70Q. 40Q imports are given domestic suppliers can't touch this. So competition happens 60Q.  SO govt Revenue should be  = T * (40Q + 60Q/2).. correct?  
> **username_2**: @username_0 oh you want to assume that the probably 50/50 applies only to the part of supply produced by domestic suppliers. In that case yes, I thought you wanna apply it to whole supply. You should then be more specific because saying that probability of consumer to buy either domestically or import is 50/50 would implicitly mean you wanna apply it on total Q  
> **username_0**: hmm... Good point, I've to think about this. Say there is 10 demand and consumer can pick either imported or domestic 50/50. And local max supply is 6 and imported max is 10 then. After 10 purchases, it'd be 5:5. But if domestic max was 4 and imported max was 10 then it'd be 4:6  
> **username_2**: @username_0 yes you could do that in that way as well, I assumed that you just wanted to consider supply as whole. However, you should also note that its not that much more realistic - you still assume that there are infinite possible imports.  
> **username_0**: yea, true. I'm thinking small island vs entire world.  
> **username_1**: @username_2 Sorry, but I think your answer is completely incorrect. See my much simpler answer.  
> **username_2**: @user253751 can you be specific and say what you think is wrong with it instead of just stating it’s completely incorrect? I don’t see anything in your answer that would be inconsistent with what I have written here.  
> **username_1**: @username_2 The answer to the asker's question is simply that they have misinterpreted the graph. Their confusion is not because the model is over-simplified and only conveys the main message.  
> **username_2**: @user253751 as I understand the OP question is why country will first fully exhaust its own supply before importing. That’s not oblivious as you say in your answer and it is oversimplified assumption because empirically countries do not necessarily always produce at full capacity and even if they do due to monopolistic competition a country can be exporting and importing the same product at the same time  
> **username_1**: @username_2 It's not exhausted though. If it was exhausted, the supply line would be flat. It's going to exhaust all the lower-price stuff before it buys the higher-price stuff, and in this graph, the lower-price stuff is domestic. There is also high-price domestic stuff, but that doesn't get bought.  
> **username_2**: @user253751 but the quantity is always bought at an equilibrium price it’s not like the first unit of Q is bought along the price when supply is 1. At a given equilibrium price where home produced good price and foreign good price is fully equal and assuming the foreign supply has no limit it is valid to ask why we even produce anything at home at all.  
> **username_2**: @user253751 also just to add to my previous comment of course saying that country will produce up to its production potential is completely reasonable if you assume that in the background all markets clear and perfect competition etc. but that is not *explicitly* modeled by supply and demand so it is in a sense oversimplification (not even mentioning that empirically many markets are not perfect, in the short run they might not immediately clear etc.)  

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### Answer by username_1 on 2020-09-01. Score: 1

In this graph, the line going up, next to the green area, shows how many domestic suppliers are willing to produce the good for a certain price.

The line going down, next to the blue area, shows how many domestic consumers are willing to consume the good for a certain price.

The part of the domestic consumption which isn't produced domestically is imported. Because where else would those goods come from?

Now, you are asking, "Why does the domestic production line only include domestic producers? How do we know the domestic production isn't partly made up of domestic producers and partly of importers?". The answer, I hope, is obvious.

Also remember this graph is comparing different price levels. The "tariff" line is how much it costs to import the good, including the tariff. No imports will happen below that line, because they'd lose money.

In this model, it's assumed that the international economy is much bigger than the domestic one under consideration. Hence, importing the good does not noticeably affect the import price.


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