Micro Foundations · intermediate
What moves on the Consumer & Producer Surplus diagram
Import competition adds low-cost supply, shifting the supply curve right so price falls, consumer surplusconsumer surplusThe gap between what buyers would have paid and what they actually paid. expands, and domestic producer surplusproducer surplusThe gap between the price sellers receive and the minimum they would have accepted. contracts.
Start with the split: how much of the gain goes to buyers versus sellers.
Trade barriers drop and low-cost foreign producers enter the market.
Supply shifts right hard. Price falls sharply and quantity jumps.
Consumer surplusconsumer surplusThe gap between what buyers would have paid and what they actually paid. balloons while domestic producer surplusproducer surplusThe gap between the price sellers receive and the minimum they would have accepted. is squeezed. Total surplus rises, but the distribution is exactly why trade is politically contested.
Examiners ask this as: imports, competition, cheaper goods, consumer surplus rises, producer surplus falls.
Other scenarios on Consumer & Producer Surplus