Question

Figure 1: Market for Musthaves Price $40 Supply 24 1X1 Demand 32 48 72 Quantity Question 1: Use Figure 1 (The Market for Musthaves) to answer the following:

do part b

Answer 1

1. Due to the event which causes Musthaves to become a relatively necessary item, its demand curve shifts rightward from D to D1. As a result, the new equilibrium is determined at price 28 at a new point E1. This can be explained with the help of the following diagram:

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• Supply KA and X 0 32 48 72 CS Scarhed with CamScanner

2. Consumer surplus is basically the area between the equilibrium price and the demand curve. It indicates monetary gain obtained by consumers.

constner Price A New ca suples w supply 40 Old consumer suplus is F-- - Di Demand 32 48 72 CS Scanned With CamScanner X Quantity

The above diagram clearly depicts the change in consumer surplus due to the rise in equilibrium price. Initially, it was the area difference between price 40 and 24. Now, it is the area difference between price p where demand curve meets Y-axis and price 28.

3. Producer surplus refers to the benefits producers receive by selling the goods in the market.

supply 40 MA New producer. 24 Spщ£ МИН Surplus TNI Demand 32 4872 CS Scanned with CamScanner Quantity

4. Total or economic surplus refers to the sum of producer and consumer surplus in the market.

s s . Price pa ous Addition to new total surplus - A total surplus oth 32 48 92 CS Scanned with CamScanner - > X Quantity