Question

The cost of producing flat-screen TVs has fallen over the past decade. If demand remains the same, what happens to equilibrium price and quantity? What happens to consumer surplus? What happens to producer surplus?

Answer 1

In the graph below, Price of Tv is on Y axis and Quantity is on X axis. DD is the demand curve and SS is the initial supply curve. E is the initial equilibrium point where equilibrium price is P0 and quantity is Q0.

Consumer surplus= Area(a)

Producer surplus= Area(b+e)

Now due to fall in cost of producing TV, the supply of TV increases which cause supply curve to shift right from SS to SS'. Now the new equilibrium point is E''.

New decreased equilibrium price is P1 and increased quantity is Q1

Consumer surplus after increase in supply= Area(a+b+c+d)

Producer surplus after increase in supply= Area(e+f+g)

Change in consumer surplus= Area(b+c+d). It implies that consumer surplus increases.

.Change in producer surplus= Area(f+g-b). Here if f+g > b the producer surplus will increase and If f+g < b the producer surplus will decrease.