The cost of producing flat-screen TVs has fallen over the past decade. Let’s consider some implications of this fact.
A.) Draw a supply-and-demand diagram to show the effect of fallen production costs on the price and quantity of flat-screen TVs sold.
B.) In your diagram, show what happens to consumer surplus and producer surplus.
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A.) To draw a supply-and-demand diagram to show the effect of fallen production costs on the price and quantity of flat-screen TVs sold, follow these steps:
1. Start by drawing a vertical axis representing price and a horizontal axis representing quantity. Label these axes accordingly.
2. Draw a downward-sloping demand curve. This curve represents the willingness and ability of consumers to buy flat-screen TVs at different prices. The demand curve should slope from the top left (high price, low quantity) to the bottom right (low price, high quantity).
3. Draw an upward-sloping supply curve. This curve represents the willingness and ability of producers to sell flat-screen TVs at different prices. The supply curve should slope from the bottom left (low price, low quantity) to the top right (high price, high quantity).
4. Locate the initial equilibrium point where the demand and supply curves intersect. This point represents the initial price and quantity of flat-screen TVs before the falling production costs.
5. Now, due to fallen production costs, the supply curve shifts to the right (i.e., it shifts downwards). This shift indicates that producers can supply more flat-screen TVs at each price level. Draw the new supply curve parallel to the original supply curve, but shifted to the right.
6. The new equilibrium is reached at the intersection of the shifted supply curve and the initial demand curve. This new equilibrium point represents the new price and quantity of flat-screen TVs after the production costs have fallen.
B.) In your diagram, consumer surplus and producer surplus can be represented as follows:
1. Consumer surplus: Consumer surplus is the difference between the price consumers are willing to pay and the actual price they pay. In the diagram, consumer surplus is the area below the demand curve and above the price paid by consumers at the new equilibrium.
2. Producer surplus: Producer surplus is the difference between the price producers receive and the minimum price they are willing to accept. In the diagram, producer surplus is the area above the supply curve and below the price received by producers at the new equilibrium.
By drawing the supply-and-demand diagram, you can visually see the effect of fallen production costs on the price and quantity of flat-screen TVs sold, as well as the changes in consumer surplus and producer surplus.
A.) Here is a step-by-step explanation of how to draw a supply-and-demand diagram to show the effect of fallen production costs on the price and quantity of flat-screen TVs sold:
Step 1: Draw the axes: Label the vertical axis as "Price" and the horizontal axis as "Quantity."
Step 2: Draw the demand curve: The demand curve shows the quantity of flat-screen TVs that consumers are willing to buy at different prices. It should slope downwards from left to right, indicating that as the price decreases, the quantity demanded increases. Label this curve as "D."
Step 3: Draw the supply curve: The supply curve shows the quantity of flat-screen TVs that producers are willing to sell at different prices. Since the cost of production has fallen, the supply curve should shift to the right, indicating that producers can supply more TVs at each price. Label the original supply curve as "S1" and the shifted supply curve as "S2."
Step 4: Determine the new equilibrium: The equilibrium is the point where the demand and supply curves intersect. It represents the price and quantity at which the market is balanced. Find the point where the demand curve "D" intersects the supply curve "S2" and label it as "E2." This represents the new equilibrium price and quantity.
Step 5: Draw a dotted line from the new equilibrium point to the vertical axis: This line represents the new equilibrium price. Label it as "P2."
Step 6: Draw a dotted line from the new equilibrium point to the horizontal axis: This line represents the new equilibrium quantity. Label it as "Q2."
B.) In your diagram, show what happens to consumer surplus and producer surplus:
Consumer surplus is the difference between the price consumers are willing to pay and the price they actually pay. To show the change in consumer surplus, draw a shaded triangle above the demand curve and below the equilibrium price "P2."
Producer surplus is the difference between the price producers receive and the minimum price they would be willing to accept. To show the change in producer surplus, draw a shaded triangle below the supply curve "S2" and above the equilibrium price "P2."
In summary, fallen production costs lead to a decrease in the price of flat-screen TVs, an increase in the quantity sold (quantity demanded), an expansion of consumer surplus, and an expansion of producer surplus.