Question

6. On the first graph, show the initial consumer and producers' surplus. On the second graph, show how the producer and consumers surplus changes when supply increases. On the third graph, show how the producer and consumers surplus changes when demand increases Price rice Supply Supply Supply Demand Domand Demand Quantity Quantit) Quantity

Answer 1

In the first graph, the consumer surplus is given by the area under the triangle AEP1 and producer surplus is given by area under the triangle CEP1.

In the second graph, let the new equilibrium after the increase in supply be E', the equilibrium price be P2 and the quantity supplied at price 0 be F. The consumer surplus will be then given by the area under the triangle P2E'A and the producer surplus is E'P2OF.

In the third graph, let the new equilibrium after increase in demand be E', equilibrium price be P2 and quantity demanded at price 0 be G. The consumer surplus is GE'P2 and producer surplus is P2E'C.