What this lesson teaches
I can work out how shifts in demand or supply change price, quantity, spending, revenue, consumer surplus and producer surplus.
Syllabus 9570, 2.1.2(f). Demand and Supply Analysis and its Applications: Changes in demand and supply can affect equilibrium price and quantity, consumer expenditure, producer revenue, consumer surplus and producer surplus
Make a guess
A supply increase cuts the price of a game console. What happens to consumer surplus?
- It stays the same, because demand did not change.
- It falls, because spending on consoles falls.
- It rises: buyers pay less and buy more.
Show the answer
It rises: buyers pay less and buy more.
Buyers gain on the units they were already buying, and new buyers enter. Both parts add to consumer surplus.
When a curve shifts, compare the surplus areas before and after.
When the equilibrium changes, the surplus areas change too. Draw both equilibria, then compare the areas.
Take a rise in supply. The price falls from P0 to P1 and quantity rises from Q0 to Q1. Consumers gain twice: they pay less for the units they already bought, and they buy extra units. Consumer surplus rises.
Producer surplus is harder. Sellers receive a lower price, but they sell more and their costs have fallen. It can rise or fall, so compare the areas rather than guessing.
- Supply rises
- Consumer surplus rises; producer surplus can go either way.
- Demand rises
- Producer surplus rises.
- Method
- Draw both equilibria and compare the areas.
| Measure | Before | After |
|---|---|---|
| Price per kit | $8 | $6 |
| Kits sold | 6 | 8 |
| Consumer surplus | $18 | $32 |
| Producer surplus | $18 | $16 |
| Total surplus | $36 | $48 |
| Revenue | $48 | $48 |
Worked example: Craft kits get cheaper to make
Suppose lower material costs shift supply right. The price falls from $8 to $6 and daily sales rise from 6 to 8 kits.
- Consumer surplus rises from $18 to $32 a day, because buyers pay less and buy more.
- Producer surplus falls slightly, from $18 to $16, in this case.
- Total surplus rises from $36 to $48: the market as a whole gains.
- Revenue is $48 both before and after, so revenue alone tells you nothing about surplus.
Watch out for this
If a supply increase lowers the price, producer surplus must fall.
Sellers get a lower price but sell more at lower cost. Producer surplus can rise or fall, so compare the areas.
Check your understanding
Demand increases and supply is unchanged. Price and quantity both rise. What happens to producer surplus?
- It rises.
- It falls, because buyers are paying more.
- It cannot change, because supply did not shift.
Show the answer
It rises.
Right. Sellers get a higher price on every unit and sell more, so the area above S and below the price grows.