Question

Assume there is a reduction in the price of materials needed to produce computers hardware such as graphic cards. Use a  supply-and-demand diagram (draw a graph) to show what happens to price, quantity, consumer surplus, producer surplus,  and total surplus in the market for computers graphic cards. And give five explanations for what had happened.

Answer 1

Step 1

Demand refers the total amount of goods and services that are willing and able to buy at the particular price level. For example, the demand for egg is obtained that the quantity of egg is purchased at price $6.

Supply refers to the level of output that produced at the particular price level. For example, the supply of egg is obtained that the quantity of egg is produced at price $6.  

Step 2

When other things remain the same decreasing raw material price leads to reduce the production cost. This in turn increases the supply of goods and services. This is shown in the below diagram.

In the above diagram, horizontal axis measures quantity and vertical axis measures price. Initially the market is in equilibrium at the point e where demand and supply intersects with each other. At this point, equilibrium price is P and equilibrium quantity is Q.

When the input price is decreases, it leads to reduce the cost of production which in turn increases the supply. This increase in supply shifts the supply curve rightward to Supply 1. Market is reaching the new equilibrium e1 where demand and s new supply curve (Supply 1) intersect with each other. The new equilibrium price is P1and quantity is Q1. Thus, the decrease in input leads to increase the equilibrium quantity and reduces the equilibrium price.

Consumer surplus is the area below demand curve and above the price line. The initial consumer surplus is the area of ‘AeP’. The new consumer surplus is the area of ‘Ae1P1’. The new consumer surplus is greater than the initial consumer surplus. Thus, decreasing input price leads to increase the consumer surplus.

Producer surplus is the area below the price line and above the supply curve. Initial producer surplus is the area of ‘BeP’. The new producer surplus is the area of ‘Ce1P1’. The new producer surplus is greater than the initial producer surplus. Thus, decreasing input price leads to increase the producer surplus.

Total surplus is the area below the demand curve and above the supply curve. Initial total surplus I the area of ‘AeB’. The new total surplus is the area of ‘Ae1C.The new total surplus is greater than the initial surplus. Thus, decreasing input price leads to increase the total surplus.