Economics

Supply and demand, opportunity cost, the production frontier and AD–AS — drawn so you can move them.

Introductory micro and macro — AP, or a first college course — is taught almost entirely through a handful of pictures. Logos draws them, and draws them as instruments: the curves are described by their intercepts and slopes, the crossing is computed rather than placed, and the sliders move real curves rather than replaying an animation.

Why economics is drawings#

Every one of these diagrams answers a question of the form what happens to this when that moves. On paper that means redrawing the whole figure, carefully, and hoping you moved the right curve. It is the redrawing — not the concept — that most of the difficulty lives in.

Supply and demand#

Two curves and the one price at which the amount wanted and the amount offered are the same number. Drag ΔD or ΔS and watch which way the crossing travels — the original curve stays behind as a dashed ghost so a shift reads as a shift rather than as a different diagram:

The thing worth doing here is the one the exam asks for. A rise in demand pushes price and quantity the same way; a rise in supply pushes them opposite ways. That difference is how you work out which curve moved when you are only told what happened to the price — and it is much easier to keep hold of once you have watched it than once you have read it.

Price controls and surplus#

Add a ceiling or a floor and the diagram gains the parts a welfare question needs: how much buyers want at that price, how much sellers offer, and — the part students reliably get backwards — which of those two numbers actually trades.

The short side decides

Nobody can be made to buy or sell, so whichever side wants less sets the quantity that changes hands. Under a binding ceiling that is the sellers; under a floor, the buyers.

Binding or not

A ceiling above the market price does nothing at all, and so does a floor below it. Move the control price through the crossing and watch the gap open and close — that is the whole of the distinction.

Deadweight loss

Surplus that simply is not created, because trades both sides would have agreed to are no longer allowed to happen. It is shaded where it is, between the two curves and out to the quantity that was lost.

Who actually pays a tax#

Ask for a per-unit tax — “put a $9 tax on every unit and show me who pays it” — and the diagram gains a second supply curve sitting exactly the tax above the first, because that is what a tax is: sellers now need the old price plus the tax at every quantity.

What opens up is a wedge. One price becomes two: buyers hand over P_b, sellers keep P_s, and the distance between them is the tax. Open the slider from zero and watch them come apart.

Incidence

How the tax splits between the two sides. Almost never evenly — and, the point of the whole exercise, not decided by who the law collects it from. Levying it on buyers instead shifts demand down by the same amount and produces the same two prices, the same quantity, and the same split. The side that can least easily walk away carries more of it, which on this diagram is the steeper curve.

Revenue

The rectangle between the two prices, over every unit still traded. It is shaded because it is not destroyed — it moves. A diagram that shades the loss and not the revenue makes a tax look like pure waste, which is a different claim from the one the model makes.

The loss

Only the trades that stopped happening. Fewer units change hands than before, and the surplus those trades would have created goes to nobody — not the buyers, not the sellers, not the government. That triangle is the deadweight loss, and it is the honest cost of the tax.

Opportunity cost and the frontier#

The production possibilities curve is opportunity cost made into a picture. The frontier is what you can have; its steepness is what the next unit costs — and on a bowed frontier that cost climbs as you specialise, which is the only thing the bow means.

Slide from one end to the other. The first unit of the first good is nearly free, because the resources moved across are the ones worst suited to what they were doing; the last few cost enormous amounts, because by then you are moving the resources that were best at the other job. Set the frontier straight instead and the cost is the same everywhere — resources equally good at both jobs, which is the special case rather than the usual one.

The other two points on the figure are the ones the curve exists to rule on. Inside it is attainable and wasteful — unemployment, or resources in the wrong place. Outside is unattainable, and stays that way until the frontier itself moves, which is what the growth control does.

AD, SRAS and potential output#

The macro picture is the same crossing with one addition that changes what the diagram is for: a vertical line at potential output. Every equilibrium is then read as a distance from that line rather than on its own terms.

Below potential is a recessionary gap — the economy is capable of more than it is producing. Above it is an inflationary gap, which is not a better economy but one running hotter than it can sustain. LRAS does not move when demand does, and watching it stay put while everything else slides is most of the intuition for why demand-side policy has limits.

What these models do not say#

These are the introductory models, and being honest about their edges is part of teaching them:

• The curves are straight. Real demand is not linear, and elasticity varies along a real curve. At this level the algebra has to stay out of the way of the idea, and a straight demand curve is the model rather than an approximation of it.
• Nothing here is estimated. The numbers are the ones you or Logos put in. A diagram showing a shortage of 30 is showing what this model implies, not a claim about any real market.
• Welfare is not the whole argument. Deadweight loss measures surplus, and surplus is not the same thing as fairness or as who bears the cost. A binding ceiling can destroy surplus and still be the policy someone argues for, on grounds this diagram does not draw.

The Answer Guard reaches these scenes like any other: when the work is learning rather than checking, the equilibrium price and quantity are withheld and the curves are drawn anyway, with a question instead of a number.