Can anyone help? I am trying the draw the following graphs for Consumer & Producer Suplus. I have made several attempts and I know I am not drawing them right.
1) The cost of producing stereo systems has fallen over the past several decades.
A)Use a supply-and-demand diagram to
show the effects of falling
production costs on the price and
quantity of stereos sold.
B)In your diagram, show what happens
to conumer suplus and producer
surplus.
2) Suppose a technological advance reduces the cost of making computers. Assume that computers and adding machines are substitutes. Use a supply-and-demand diagram to show what happens to price, quantity, consumer suplus, and producers surplus in the market for adding mcahines. Should adding machine producers be happy or sad because of the technological advance in computers?
Ok, start by drawing initial supply and demand curves for stereos, with this slight caveat -- have the supply and demand curves touch the price axis (y-axis.) Consumer surplus is the area that is a) below demand, but b) above price. Producer surplus surplus is the area that is a) above supply, but b) below price.
Falling production costs for stereos means their should be an increase in supply. Shift the supply curve to the right. Price falls, quantity goes up.
What happens to PS and CS? Obviously, consumer surplus went up, as the new area for CS is larger. However, the effect on producer surplus is uncertain. Depending on the shapes of the curves (i.e., the elasticities of supply and demand), the total amount of PS could go up or down.
2) take in from here. Note that droping the price of computers should reduce the demand for adding machines as computers and adding machines are substitutes.
Thank you for your response.
I understand about consumer and producer surplus and what happens. The book shows the graph for when the price is going up. It does not give and example for when the price decreased. What the diagram's show in the book is three shaded areas for each surplus. The first is the initial consumer/producer surplus, the second is the additional conumer/producer surplus and the thied is the additional surplus or even loss to new consumers/producers. When I try to draw the graph, I know I am not drawing the graph correctly. Especially when I try to draw the third shaded areas
Sorry, Im having trouble understanding whs you mean by the third area. But my advice is to keep it simple; consumer surplus is the area below demand but above price. Period. When you shift your supply/demand curves, check for 3 (and only 3) possible conditions. 1) the new consumer surplus includes all of the original area plus some more -- CS goes up. 2) the new consumer surplus is completely inside the original area -- CS goes down, or 3) some part of the original CS is lost but some new portion is added. -- CS change is uncertain.
Repeat logic for producer surplus.
consumer suprplus is the are which is above E(equilibrium point). &
producer suprplus is the area which is below E (equilibrium point ).