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AndrewKraus AndrewKraus
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2 years ago
Explain the impact on producer surplus of an increase in demand for Good X with the help of a suitable diagram.
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Microeconomics


Edition: 1st
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SimplemanSimpleman
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2 years ago
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Change in producer surplus can be explained by the difference of the areas of the producer surplus before the shift in the demand curve and the producer surplus after the shift.
The initial demand curve is D1 and it intersects the supply curve, S, at point B. The equilibrium price is P1 and the equilibrium quantity is Q1.
Producer surplus for the firm is the area between its supply curve and the market price line. Therefore, the initial producer surplus is equal to the area of the triangle ABP1.
After the demand curve shifts to D2, the equilibrium price and quantity change. D2 intersects S at C; the new equilibrium price is P2 and the new equilibrium quantity is Q2. The producer surplus is now equal to the area of the triangle ACP2.
The area of triangle ACP2 is greater than the area of triangle ABP1. Using this information, and everything else remaining unchanged, when there is a rightward shift in the demand for Good X, the producer surplus increases.
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