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Chapter 7
- If an early freeze in California sours the lemon crop, the supply curve for lemons shifts to the left, as shown in Figure 5. The result is a rise in the price of lemons and a decline in consumer surplus from A + B + C to just A. So consumer surplus declines by the amount B + C.
Figure 5
In the market for lemonade, the higher cost of lemons reduces the supply of lemonade, as shown in Figure 6. The result is a rise in the price of lemonade and a decline in consumer surplus from D + E + F to just D, a loss of E + F. Note that an event that affects consumer surplus in one market often has effects on consumer surplus in other markets.
Figure 6
- A rise in the demand for French bread leads to an increase in producer surplus in the market for French bread, as shown in Figure 7. The shift of the demand curve leads to an increased price, which increases producer surplus from area A to area A + B + C.
Figure 7
The increased quantity of French bread being sold increases the demand for flour, as shown in Figure 8. As a result, the price of flour rises, increasing producer surplus from area D to D + E + F. Note that an event that affects producer surplus in one market leads to effects on producer surplus in related markets.
Figure 8
Chapter 9
1. a. In Figure 3, with no international trade the equilibrium price isP 1 and the
equilibrium quantity isQ 1. Consumer surplus is area A and producer surplus is
area B + C, so total surplus is A + B + C.
Figure 3
b. When the U.S. orange market is opened to trade, the new equilibrium price is
PW, the quantity consumed isQD, the quantity produced domestically isQS, and
the quantity imported isQD – QS. Consumer surplus increases from A to A + B +
D + E. Producer surplus decreases from B + C to C. Total surplus changes from A + B + C to A + B + C + D + E, an increase of D + E.
- The impact of a tariff on imported autos is shown in Figure 6. Without the tariff, the
price of an auto isPW, the quantity produced in the United States isQ 1 S, and the quantity
purchased in the United States isQ 1 D. The United States importsQ 1 D^ – Q 1 S^ autos. The
imposition of the tariff raises the price of autos toPW + t, causing an increase in quantity
supplied by U.S. producers toQ 2 S^ and a decline in the quantity demanded toQ 2 D, thus
reducing the number of imports toQ 2 D^ – Q 2 S. The table shows the impact on consumer
surplus, producer surplus, government revenue, and total surplus both before (OLD) and after (NEW) the imposition of the tariff, as well as the change (CHANGE). Since consumer surplus declines by C+D+E+F while producer surplus rises by C and government revenue rises by E, the deadweight loss is D+F. The loss of consumer surplus in the amount C+D+E+F is split up as follows: C goes to producers, E goes to the government, and D+F is deadweight loss.
Figure 6
Before Tariff After Tariff CHANGE Consumer Surplus A+B+C+D+E+F A+B –(C+D+E+F) Producer Surplus G C+G +C Government Revenue 0 E +E Total Surplus A+B+C+D+E+F+G A+B+C+E+G –(D+F)
