A decrease in price and total producer surplus

After you have worked through this section of the learning unit, you should be able to:

  • illustrate and explain with the aid of a diagram what happens to total producer surplus if the price change

What happens to the producer surplus if the market price decreases to, say, R3?

According to our supply curve, the quantity supplied decreases to 240. Producer surplus therefore decreases since producers are selling fewer pieces of fried chicken and receiving a lower price for them.

The total producer surplus therefore decreases from the area 0-4-E (diagram) to 0-3-E1 (diagram).

The loss due to selling less is indicated by the area E1-B-E (diagram). The loss in the producer surplus due to receiving a lower price is indicated by the area 3-4-B-E1.  (diagram)

Activity

Do the following activity to see if you understand what happens to producer surplus if the price changes:

The following diagram indicates the market supply for ice cream and the producer surplus at a market price of R15.

If the market price increases from R15 to R20, the producer surplus will (increase, decrease, stay the same) since producers are selling (less, more) ice cream and receiving a (lower, higher) price for it.

Correct.  The price is now higher which increases the producer surplus.

Think again.  The price the producer receives is now higher.

Think again.  The price the producers receives is now higher,

Think again.  They sell more at a higher price.

Correct.  They sell more at a higher price.

Think again.  The market price has increased.

Correct.  The market price has increased.

The producer surplus at R20 is the area __________

Click to see the answer

The producer surplus at R20 is the area 0-20-m, as indicated in the following diagram:

The change in the producer surplus if the price increases from R15 to R20 is represented by the area _______

Click to see the answer

The change in the producer surplus if the price increases from R15 to R20 is represented by the area 15-20-M-L, as indicated in the diagram below.