In this video we will examine how changes in market equilibrium impact consumer and
producer surplus.
We’ve already seen what consumer and producer surplus represent, but have yet to see how
changes in supply and demand will impact them.
The graph we are familiar with already is the market equilibrium model.
At a price of P* customers have purchased a quantity of Q*.
The total additional benefit enjoyed for consumers is the entire area above the price paid but
below the demand curve.
If you’re unclear about the idea of consumer surplus, check out my earlier video in this
unit.
I’ll include the link in the video notes.
As for sellers, the market price they receive is P*, with some sellers willing to sell at
a lower price.
Their benefit is measured by the difference between the price they are willing to sell
at and the price they actually receive.
So the producer surplus is the entire region below the price and above the supply curve.
Again, if this is unclear to you, go back and review the video on producer surplus earlier
in this unit.
The link will be in the video notes.
First we will take a look at how changes in demand can cause a change in consumer or producer
surplus.
Let’s first examine an increase in demand and the change it has on consumer surplus.
From our initial state, we see the original consumer surplus as shown in the earlier part
of the video.
Let’s remove it and increase demand.
Suppose the demand for a product rises due to a successful marketing campaign.
Once the demand curve shifts right the equilibrium price and quantity both increase.
We apply the same logic to deduce the new consumer surplus and consider the area above
the new market price and below the new demand curve to find our new consumer surplus.
Although it has not been graphed here, you should be able to determine the change in
producer surplus as well.
While the original producer surplus was the area below P* and above S, it is now the area
below P1 and above S, demonstrating an increase.
Let’s now examine a decrease in demand and the change it has on producer surplus.
From our initial state, we see the original producer surplus as shown in the earlier part
of the video.
Let’s remove it and decrease demand.
Suppose the demand for a product falls due to a change in fashion that makes the product
less desirable.
Once the demand curve shifts left the equilibrium price and quantity both decrease.
We apply the same logic to deduce the new producer surplus and consider the area below
the new market price and above the supply curve to find our new producer surplus, which
appears to have decreased.
Although it has not been graphed here, you should be able to determine the change in
consumer surplus as well.
While the original consumer surplus was the area above P* and below D, it is now the area
above P1 and below D1.
For supply we will first examine a change in producer surplus as a result of an increase
in supply.
From the initial position, we see our producer surplus as indicated in the start of the video.
Once supply increases from S to S1, potentially as a result of an increase in productivity,
the equilibrium price falls to P1 and equilibrium quantity rises to Q1.
As a result, we adopt the same approach in considering our new producer surplus and use
the new price as our upper border and new supply curve of S1 as our lower border.
This area represents our new producer surplus.
For supply we now examine a change in consumer surplus as a result of a decrease in supply.
From the initial position, we see our consumer surplus as indicated in the start of the video.
Once supply decreases from S to S1, potentially as a result of an increase in taxes, the equilibrium
price rises to P1 and equilibrium quantity falls to Q1.
As a result, we adopt the same approach in considering our new consumer surplus and use
the new price as our lower border and the existing demand curve D as our upper border.
This area represents our new consumer surplus.
Once again I hope you’ve found this video helpful and useful in your revision of CIE
AS economics.
If you have any questions, please don’t hesitate to contact me at enhancetuition@gmail.com,
leave a message in the comments section below or tweet me @enhancetuition.
As always, happy studying!