Question

3 Identify using capital letter(s) the area on your diagram that represents the change in producer surplus. Provide an explanation for your answer.

Answer 1

PRODUCER SURPLUS

It is quite often the difference between;

1. The amount received by the producer at the time of supply of goods and

2. The amount they actualy wants to be received for the supply of such good.

In short, producer surplus is something which the the amount which is received by the producer by selling at market price which is higher than the lowest price at which they would be ready to sell.

Also we can simply say that the difference between the prices what producers are receiving and what he is willing to pay. Producer surplus is the additional money or additional benefit received by the producer from selling a product at an amount which is higher than the lowest accepted price which is shown in the above supply curve.

Producer surplus is get influenced by various factors;

• Changes in Price :-

This is directly related with the surplus, a producer receive while making supply. When it comes to a graphical presentation, producer surplus lies below the price but above the supply curve. In the following diagram it can be seen that as and when the price equilibrium increases, producer surplus also increases along with the goods supplied. Lower prices results in lower producer surplus and goods supplied along with a lower equilibrium price.

• Demand Curve :-

Demand curve shifts (Upwards or Downwards) are also directly influenced with producer surplus.

1. If Demand falls, then the demand curve will shift to left and there will be decrease in Producer surplus.
2. If Demand rises, then demand curve will shift to right and also producer surplus increases.

In the above diagram, producer surplus is the triangle lies in P1, A and B.

• Supply Curve :-

Same like demand curve, shift in supply curve is also closely influenced the producer surplus.

1. Fall in Supply curve results in fall in producer surplus.
2. Similarly rise in supply curve causes rise in producer surplus.

• Price Elasticity of Supply :-

It is the correlation between changes in quantity and price.

1. When there is Elastic supply, producer can raise production without having much prices.
2. When there is Inelastic supply, producers couldnot change the production easily.