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.

A. 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)

B. 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

A. When wildfires detroyed i.e majority of orange farms . This will reduced the orange production. As production of orange reduced this shifts the supply curve leftward from S to S1 as shown in the below figure:

Earlier , When demand and supply is in equilibrium : Equilibrium quantity of oranges is Q and Equilibrium price is P. Consumer surplus is the area above the price line P and below the demand curve . It is shown by the area (A+B) in the graph above.

But when supply shfts leftward then equilibrium price rises to P1 and equilibrium quantity of oranges reduced to Q1. Consumer surplus is the area above the price line P1 and below the demand curve. Consumer surplus reduced to area A. It implies that consumers surplus decreases.

B. The price of apple i.e the substitute of orange , decreased . Then , consumers will consume less of oranges and more of apples. Therefore, demand curve for oranges shifts leftward from D to D1, as shown in the figure below:

Earlier, when demand and supply is in equilibrium . Then , equiibrium quantity of oranges is Q and equilibrium price is P. Producer surplus is the area below the price line P and above the supply curve . It is represented by the area (C+D) in the above garph.

But when there is shift in demand curve to D1. Then , equilibrium price of oranges reduced to P1 and equilibrium quantity of oranges reduced to Q1. Producer surplus is the area below the price line P1 and above the supply curve. It is represented by the area C. It implies that the producer surplus decreases.