Assume short-run demand and supply curves for dry cleaning have the usual slopes, and each unit produced requires some amount of labour and exactly 1 unit of dry-cleaning fluid. What will be the short-run result of a decrease in the cost of dry-cleaning fluid?
a) increase in producer surplus and increase in consumer surplus
b) increase in producer surplus and decrease in consumer surplus
c) decrease in producer surplus and increase in consumer surplus
d) decrease in producer surplus and decrease in consumer surplus
e) producer surplus may increase or decrease while consumer surplus will increase
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To determine the short-run result of a decrease in the cost of dry-cleaning fluid, we need to understand the impact on the supply curve and the resulting changes in producer and consumer surplus.
First, let's consider the supply curve. The decrease in the cost of dry-cleaning fluid will reduce the production cost for each unit of dry cleaning. Since dry-cleaning fluid is a necessary input in the production process, a decrease in its cost will effectively lower the overall cost of production.
This decrease in production costs will lead to a shift in the supply curve to the right. The new supply curve will intersect with the demand curve at a lower equilibrium price and a higher equilibrium quantity of dry cleaning services produced.
Now let's analyze the impact on producer and consumer surplus.
Producer surplus represents the difference between the price at which producers are willing to supply a good/service and the actual price they receive. With the decrease in the cost of dry-cleaning fluid, the producers can now offer the same quantity of dry cleaning at a lower cost. As a result, their producer surplus increases.
Consumer surplus, on the other hand, represents the difference between the price that consumers are willing to pay for a good/service and the actual price they pay. In this case, the decrease in the cost of dry-cleaning fluid allows producers to offer dry cleaning at a lower price. This can lead to an increase in consumer surplus as consumers can now enjoy the same service at a lower cost.
Considering the above analysis, the correct answer would be:
a) Increase in producer surplus and increase in consumer surplus.