I have the following question in my assignment:
The cost of producing stero systems has fallen over the past several decades.
A:Use the supply-and-demand diagram to show the effects of fallaing production costs on the price and quantity of steros sold.
B:In you diagram, show what happens to consumer surplus and producer surplus.
I understand what is happening. I can draw the graph for A. I can't draw the graph for B.
The text gives the following two examples. I understand them. I can't draw the graph properly for when the price is going down.
Sorry, the following are the best I could do to try to draw the examples of the graphs.
Consumer Suplus
~
~~
~~~~~~~
~~~~~~~~Initial Consumer Surplus
~~~~~~~~~~
~~~~~~~~~~~~~
P1XXXXXXXXXXXX__>>>>>>>>>
Additonal_______>>>>>>>>>>Consumer
Consumer Surplus>>>>>>>>>>>Surplus to
to initial_______>>>>>>>>>>>New
Consumers________>>>>>>>>>>>>Consumers
P2XXXXXXXXXXXXX__>>>>>>>>>>>>>
_________________Q1__________Q2
Producer Surplus
P2XXXXXXXXXXXXXXX>>>>>>>>>>
AdditionalXXXXXXX>>>>>>>>Producer
ProducerXXXXXXXXX>>>>>>Suplus to New
Surplus toXXXXXXX>>>>Producers
Initial Producers>>>
P1XXXXXXXXXXXXXXX>>
~~~~~~~~~~~~~~~
~~~~~~~~~~~~ Initial Producer Surplus
~~~~~~~~~~
~~~~~~~~
~~~~~
~~
_________________Q1________Q2
Ok, in your graphs, have both the supply curve and the demand curve touch the Y-axis.
Consumer surplus is represented by the area below the demand curve but above equilibrium price.
Producer surplus is represented by the area above the supply curve but below equilibrium price.
Now shift the supply curve. What is the new area of consumer surplus? What is the new area of producer surplus?
(With the increase in supply, consumer surplus should have unambigiously grown. The change in the size of producer surplus is uncertain -- could be bigger could be smaller)
what is a definition on the concept additional consumer surplus to initial consumers
To properly draw the graph for consumer surplus and producer surplus, you can follow these steps:
1. Start by drawing the supply and demand diagram to represent the market for stereo systems. Label the vertical axis as price (P) and the horizontal axis as quantity (Q).
2. Plot the initial supply curve and demand curve. The supply curve should be upward sloping, indicating that producers are willing to supply more stereo systems at higher prices. The demand curve should be downward sloping, indicating that consumers are willing to buy more stereo systems at lower prices.
3. Locate the initial equilibrium point, where the supply and demand curves intersect. Label the price and quantity at this point as P1 and Q1.
4. Now, to show the effects of falling production costs on the price and quantity of stereo systems, shift the supply curve to the right. This shift occurs because lower production costs enable producers to supply more stereo systems at each price level. The new supply curve should still be upward sloping, but it should be located to the right of the initial supply curve.
5. Observe the new equilibrium point where the shifted supply curve intersects the original demand curve. Label the price and quantity at this point as P2 and Q2.
6. To represent consumer surplus, shade the triangular area above the demand curve and below the price line P1Q1. This represents the difference between what consumers are willing to pay (indicated by the demand curve) and what they actually pay (indicated by the price P1).
7. To represent producer surplus, shade the triangular area below the supply curve and above the price line P1Q1. This represents the difference between what producers receive (indicated by the price P1) and their production costs.
8. Now, to show the changes in consumer surplus and producer surplus, compare the shaded areas before and after the fall in production costs. With falling production costs, the supply curve shifts to the right, causing the equilibrium price (P2) to decrease and the equilibrium quantity (Q2) to increase.
9. As a result, the consumer surplus increases because consumers can now purchase stereo systems at a lower price than before. This is represented by a larger shaded area above the demand curve after the shift in supply.
10. Similarly, the producer surplus also increases because producers are able to sell more stereo systems at a higher quantity and still receive the same or higher price. This is represented by a larger shaded area below the supply curve after the shift.
Remember, the diagrams provided are just rough representations of what the graph should look like. Drawing a precise and accurate graph will provide a clearer visualization of the changes in consumer surplus and producer surplus due to falling production costs.