Let’s talk superhero action figures. (Chapter 3 Q&A)

20/09/2012 § Leave a comment

#2 List three possible reasons why the supply for automobiles, for example, would increase and explain how this change will result in a new equilibrium.

Three reasons why the supply for automobiles would increase include production efficiency (productivity), a decrease in the price of related goods (like Metal A is suddenly cheaper to use than Metal B), and a decrease in the cost of production (related to efficiency). Say for example Car Company X upgraded their technology and could make twice as many cars as they could in the time it previously took to make a certain amount of cars. This increase their productivity and ability to supply cars. The increase in supply causes a momentary surplus in the car market and to adjust, the suppliers will reduce their price a little. The decrease in the price will encourage consumers to increase their quantity demanded, which, on a supply/demand graph is movement to the right on the demand curve. This lower price but higher quantity demanded is the new equilibrium for automobiles.

#4 Using a diagram, explain the concept of community surplus.

Community surplus is the total of consumer surplus and producer surplus. In a particular market, this is the added benefit both the producers and consumers receive as a result of the price of the good being lower than they are willing to purchase (consumers) or the price being higher than they are willing to supply (suppliers).

Let’s talk, like, I don’t know, relatively exclusive superhero action figures. Some people are willing to pay higher than the set market price for this good, therefore, with consumer surplus, the consumers will pay a price below what they are willing to pay. Maybe Sheldon is willing to pay $10 more than the market price of that action figure because he thinks it’s really valuable. If the market price were, say, $15, and he were willing to pay $25 for the action figure, his consumer surplus would be $10.

It’s similar with producer surplus. A supplier will receive the benefit of a producer surplus when they receive a price above the one for which they were willing to sell their good. Remember, consumers like lower prices but suppliers like higher prices. So, perhaps the factories that are producing Sheldon’s action figures are very efficient and the suppliers were alright with selling their goods at $8. Since the market price is set to $15 (this is where the market equilibrium is), then the supplies will receive the benefit of a producer surplus of $7.

Community surplus is the total of these values. In a graph, you’d have to find the area of the shaded consumer surplus and the area of the shaded producer surplus. Both producer and consumer surplus are shaded as the area between the demand/supply curve, respectively, and the market price equilibrium. You should use the equation for the area of a triangle (because, you know, the shape on the graph is a triangle) to find the producer/consumer surplus at all possible points.

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