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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

Suppose the demand for French bread rises. Explain what happens to producer surplus in the market for French bread. Explain what happens to producer surplus in the market for flour. Illustrate your answers with diagrams.

To determine
Impact of increased demand for French bread on associated floor market.

Explanation

The equilibrium price is determined by the demand for the coat and the supply of coat normally. The consumer surplus can be explained as the difference between the highest price that the consumer is willing to pay and the actual price that the consumer pays. The difference between these two prices is known as the surplus to the consumer. The producer surplus is the difference between the minimum willing to accept price by the seller and the actual price that the seller receives for the commodity.

When there is an increase in the demand for the French bread in the market, the demand curve in the economy will shift towards the right of the existing demand curve. As a result of the new rightward demand curve in the economy, the price level of the economy will increase and the quantity demanded will increase which will increase the producer surplus. This can be illustrated as follows:

From the graph above, we can easily identify that when the demand for the bread increases, it will shift the demand curve towards the right to form D2. The new demand curve intersects with the supply curve to form P2 price which is higher than the previous price level and Q2 quantity which is also higher than the previous level. As a result of this, the producer surplus increases to area of A+B+C from just the area of A...

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