Equilibrium in one picture
Demand slopes down because buyers want less of a good as its price rises: they switch to substitutes, and a higher price leaves them less to spend. Supply slopes up because a higher price makes it worth producing units that cost more to make. Price goes on the vertical axis and quantity on the horizontal, a convention economics inherited from Alfred Marshall.
Equilibrium is the price at which the quantity buyers want equals the quantity sellers offer. Below it there is a shortage, and competition between buyers bids the price up; above it there is a surplus, and sellers cut prices to clear their stock. In the explorer, demand is Qd = 20 − 2P and supply Qs = −4 + 2P, so the market clears at a price of £6 with 8 units traded.
Shifts versus movements along a curve
A change in the good’s own price moves you along a curve. Everything else shifts one. Demand shifts with income, with the prices of substitutes and complements, with tastes, with expectations and with the number of buyers. For a normal good a rise in income shifts demand right; for an inferior good it shifts demand left.
Supply shifts with input costs, technology, the number of sellers and taxes or subsidies on production. A useful habit in exams: before drawing anything, ask whose decision the news changes first. A late frost changes what farmers can grow, so supply moves; a celebrity endorsement changes what buyers want, so demand moves.
Consumer and producer surplus
Consumer surplus is the area under the demand curve and above the price: the gap between what each buyer would have paid and what they did pay. Producer surplus is the area above the supply curve and below the price. At the explorer’s starting equilibrium each is half of 8 times 4, which is £16.
With no externalities and competitive buyers and sellers, the equilibrium maximises the sum of the two. That is why so much of a first-year welfare question comes down to finding which triangle a policy removes.
Who pays a tax
A per-unit tax on sellers shifts the supply curve up by the tax. Buyers now pay where that new curve meets demand, and sellers keep that price minus the tax. Who formally pays the tax to the government makes no difference to the outcome: the burden falls more heavily on whichever side is less able to walk away, which is to say the side with the less elastic curve.
In the explorer both curves are equally steep, so a £2 tax splits evenly. Buyers pay £7, sellers keep £5, and the quantity falls from 8 to 6. Revenue is £2 on each of 6 units, £12. The deadweight loss is the triangle between the curves from 6 to 8 units, half of 2 times 2, which is £2. Double the tax to £4 and the deadweight loss rises to £8: with straight-line curves it grows with the square of the tax.
Subsidies, floors and ceilings
A subsidy is a tax in reverse. Sellers receive more than buyers pay, the quantity rises past the efficient level, and the subsidy costs more than the extra surplus it creates. With a £2 subsidy the explorer trades 10 units, buyers pay £5, sellers receive £7, and the subsidy costs £20 against a deadweight loss of £2.
A price ceiling only binds below the equilibrium price. Set one at £5 and sellers offer 6 units while buyers want 10, a shortage of 4. Rent controls are the classic case. A price floor only binds above equilibrium: at £7 sellers offer 10 units and buyers take 6. A minimum wage in a competitive labour market, and Scotland’s minimum unit price for alcohol, are both price floors, which is why the evidence on what they actually do matters so much in policy debates.
Elasticity and the shape of the curves
Straight lines have a constant slope but not a constant elasticity: demand is elastic near the top of a straight line and inelastic near the bottom. When a question tells you demand is perfectly inelastic, draw it vertical; then buyers bear the whole of a tax and there is no deadweight loss, because the quantity doesn’t change.
The explorer keeps the textbook’s round numbers so the arithmetic is checkable by hand. Your module may use different functions, and the method carries over: solve for equilibrium, then find the areas.