Question

Suppose we are analyzing the market for oranges in 2017. Graphically illustrate the impact of each of the following events on consumer or producer surplus. In 2017, Wildfires destroyed a majority of orange farms, reducing the orange production substantially, and what would be the impacts on consumer surplus? (Graphical analysis + Written discussions = at least 100 words) The price of apple, orange substitute, decreased in 2017. What would be the impacts on producer surplus? (Graphical analysis + Written discussions = at least 100 words)

Answer 1

Consumer surplus is the difference between the price a consumer is willing and able to pay for an additional unit of a good and the price they actually pay for it. A drop in price will increase the consumer surplus while a rise in price will decrease the consumer surplus. We can see in the graph above, that because of the significant reduction in the production of oranges the supply curve will shift to the left. Thus, an increase in the market equilibrium price of oranges can be seen in the shift from P1 to P2. The consumer surplus, in this example, is represented by the shaded area on the graph. We can see that the shaded area between P2 and D2 shows a decrease in the consumer surplus as it is a smaller than the original consumer surplus area between P1 and D1 prior to the wildfires. This fits with the stated theory of consumer surplus above where a rise in the price of a good will result in a decrease in the consumer surplus of that good.