Micro Foundations · intermediate
What moves on the Consumer & Producer Surplus diagram
A negative supply shock raises marginal costmarginal costThe cost of producing one more unit., shifting supply left so price rises and quantity falls, cutting consumer surplusconsumer surplusThe gap between what buyers would have paid and what they actually paid. and total gains from trade.
Both triangles are intact at the starting equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change..
A flood destroys a large share of the crop, and the cost of supplying each unit jumps.
Supply shifts left: price rises and quantity traded falls.
Consumer surplusconsumer surplusThe gap between what buyers would have paid and what they actually paid. is squeezed from both sides, by the higher price and the lost trades. Total surplus falls even though sellers get a better price.
Examiners ask this as: supply shock, shortage, disruption, surplus falls, price rises.
Other scenarios on Consumer & Producer Surplus