Question 1

What happens to consumer surplus when the supply curve shifts left?

Accepted Answer

When the supply curve shifts left due to higher production costs, the equilibrium price rises and equilibrium quantity falls. Consumer surplus decreases because buyers pay more per unit and purchase fewer units overall. This reduction reflects the negative impact of reduced supply on consumer welfare.

Question 2

How does a leftward supply curve shift affect producer surplus?

Accepted Answer

A leftward supply curve shift creates mixed effects on producer surplus. While some initial producer surplus is lost due to lower quantity sold, part of the initial consumer surplus transfers to the new producer surplus. The net change in producer surplus remains ambiguous because these opposing forces offset each other.

Question 3

Why does equilibrium price increase when production costs rise?

Accepted Answer

When production costs increase, firms face higher expenses, causing the supply curve to shift left. With less supply available at each price level, market forces push the equilibrium price upward. This higher price reflects the scarcity created by reduced production capacity in the market.

Question 4

What is the relationship between supply shifts and market equilibrium?

Accepted Answer

Supply shifts directly determine new market equilibrium points. When supply decreases, the equilibrium price rises and quantity falls. Conversely, when supply increases, the equilibrium price falls and quantity rises. These changes redistribute wealth between consumers and producers through changes in their respective surpluses.

Question 5

How does a rightward supply curve shift affect consumer and producer surplus?

Accepted Answer

When production costs decrease and supply increases, the supply curve shifts right, lowering the equilibrium price and raising equilibrium quantity. Consumer surplus grows because buyers pay less and purchase more. However, the net effect on producer surplus remains uncertain due to offsetting gains and losses.

Question 6

What determines the initial equilibrium in a perfectly competitive candy market?

Accepted Answer

In a perfectly competitive market with many identical sellers, market forces of demand and supply determine the equilibrium price and quantity. At equilibrium, the quantity supplied equals quantity demanded. Consumers benefit through consumer surplus, while producers benefit through producer surplus.

Question 7

Why is the net change in producer surplus ambiguous after a supply shift?

Accepted Answer

Producer surplus experiences conflicting effects after a supply shift. When supply decreases, producers lose surplus from selling fewer units, but gain from higher prices. When supply increases, they gain from selling more units but lose from lower prices. These opposing forces create an ambiguous net outcome.

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