Micro Foundations · intro
What moves on the Consumer & Producer Surplus diagram
A per-unit subsidysubsidyA government payment per unit that lowers effective production costs and expands output. lowers marginal costmarginal costThe cost of producing one more unit., shifting supply right so price falls and quantity rises, expanding consumer and producer surplusproducer surplusThe gap between the price sellers receive and the minimum they would have accepted. before the taxpayer cost is netted off.
Consumer surplusconsumer surplusThe gap between what buyers would have paid and what they actually paid. is the area under demand and above price; producer surplusproducer surplusThe gap between the price sellers receive and the minimum they would have accepted. is above supply and below price.
A per-unit subsidysubsidyA government payment per unit that lowers effective production costs and expands output. lowers the effective cost of producing each unit.
Supply shifts right, price falls, and quantity traded rises: both shaded areas grow.
Careful in an exam: the surplus gain here is partly funded by taxpayers, so total welfare needs the subsidysubsidyA government payment per unit that lowers effective production costs and expands output. cost subtracted.
Examiners ask this as: subsidy, consumer surplus rises, producer surplus, government support, cheaper.
Other scenarios on Consumer & Producer Surplus