Consumer and producer surplus

Supply increases

What Happens: An increase in supply shifts the supply curve to the right (e.g., due to lower production costs or technological improvements). This leads to a lower equilibrium price and a higher equilibrium quantity.

Impact on Consumer Surplus: Consumers benefit from the lower price, as they pay less for the good, and the increased quantity allows more consumers to purchase at prices below their willingness to pay. CS increases, as the area under the demand curve and above the new (lower) price expands.

Impact on Producer Surplus: Producers receive a lower price per unit, which reduces the surplus on each unit sold. However, the increased quantity sold may offset this loss. Overall, PS typically decreases if the price drop is significant, as the area above the supply curve and below the new (lower) price shrinks, despite the higher quantity.

Example: If a technological advance lowers the cost of producing smartphones, supply increases, prices fall, and more units are sold. Consumers gain larger CS from cheaper phones, but producers may see reduced PS due to lower prices, even with higher sales.

Supply decreases

What Happens: A decrease in supply shifts the supply curve to the left (e.g., due to higher input costs or supply chain disruptions). This results in a higher equilibrium price and a lower equilibrium quantity.

Impact on Consumer Surplus: Consumers face a higher price, reducing the number of consumers who can afford the good and decreasing the surplus for those who still purchase. CS decreases, as the area under the demand curve and above the new (higher) price contracts.

Impact on Producer Surplus: Producers receive a higher price per unit, increasing the surplus on each unit sold. However, the reduced quantity sold may limit this gain. Overall, PS may increase if the price rise outweighs the quantity reduction, as the area above the supply curve and below the new (higher) price can expand, depending on the supply curve’s shape.

Example: If a drought reduces the supply of coffee, prices rise, and fewer units are sold. Consumers lose CS due to higher prices and less access, while producers may gain PS from higher prices, though this depends on how sharply quantity falls.

Demand increases:

What Happens: An increase in demand shifts the demand curve to the right (e.g., due to higher consumer income or changing preferences). This leads to a higher equilibrium price and a higher equilibrium quantity.

Impact on Consumer Surplus: The higher price means consumers pay more, reducing the surplus per unit purchased. However, the increased quantity allows more consumers to buy, potentially offsetting this loss. Overall, CS may increase or decrease depending on the demand curve’s shape and the price rise’s magnitude. If the price increase is modest and quantity expands significantly, CS can rise due to greater access to the good.

Impact on Producer Surplus: Producers benefit from both a higher price and increased quantity sold. PS increases, as the area above the supply curve and below the new (higher) price expands significantly due to both factors.

Example: If a viral trend boosts demand for a new gadget, prices and sales rise. Producers gain PS from higher prices and more units sold, while CS may vary: consumers pay more but benefit from greater access, potentially increasing CS if the quantity effect outweighs the price effect.

Demand decreases:

What Happens: A decrease in demand shifts the demand curve to the left (e.g., due to a change in tastes or economic downturn). This results in a lower equilibrium price and a lower equilibrium quantity.

Impact on Consumer Surplus: The lower price benefits consumers who still purchase, increasing the surplus per unit. However, the reduced quantity means fewer consumers buy, limiting total surplus. Overall, CS typically decreases, as the area under the demand curve and above the new (lower) price shrinks due to lower consumption.

Impact on Producer Surplus: Producers suffer from a lower price and reduced quantity sold, leading to a smaller PS. The area above the supply curve and below the new (lower) price contracts, reflecting lower revenue and profitability.

Example: If consumers lose interest in a type of clothing, demand falls, lowering prices and sales. Consumers who still buy gain from lower prices, but CS often falls due to reduced purchases. Producers lose PS from both lower prices and fewer units sold.