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Homework answers / question archive / In each market, state if the producer surplus will increase or decrease
In each market, state if the producer surplus will increase or decrease.
a. Market for lemonade: the price of orange juice, a substitute to lemonade, decreases.
b. Market for bread: consumers go on low-carb diets and drastically reduce their bread consumption.
c. Market for computers: computers are a normal good and the income of buyers increases.
The producer surplus is the difference between the minimum price at which the producer is willing to offer a good or service and the price at equilibrium. This is the benefit that producers receive from their market participation. The producer surplus is the area above the supply curve but below the market price curve. The higher the equilibrium price, the higher the producer surplus. Based on this, you can find below the answer and explanations.
a. Given that the price of a substitute decreases, the demand for lemonade will decrease. The demand decrease will also cause a decrease in the equilibrium price (ceteris paribus). Therefore, the producer surplus will decrease.
b. In this scenario, consumers changed preferences. Now the demand for bread (high-carb) will decrease. Similar to the previous example, a demand decrease will lead to a decrease in the equilibrium price (ceteris paribus). Therefore, the producer surplus will decrease.
c. A normal good is a type of good whose demand increase as the income of consumers increases. Therefore, in this case, the demand for computers will increase. This will cause an increase in the equilibrium price (ceteris paribus). Therefore, the producer surplus will increase.
