Question

Suppose the demand curve for a good is downward sloping and the supply curve is upward sloping. Now suppose demand rises. Will producers' surplus rise or fall? Explain your answers.

Short answer

When demand rises, the producers' surplus will rise due to an increase in the equilibrium price which encourages more production from suppliers.

Step-by-step solution

Understand the concepts involved

The demand curve is downward sloping which means as price decreases, the quantity demanded increases. The supply curve is upward sloping, signifying that as price increases, quantity supplied increases. Producers' surplus is the amount producers receive above what they would be willing to accept - the area above the supply curve and below the price, up to the point of equilibrium. When demand rises, the demand curve shifts to the right.

Analyze changes in demand

A rise in demand implies that the demand curve shifts to the right. When this happens, for a given price, buyers are willing to purchase more of the good.

Predict changes in market equilibrium and surpluses

As demand increases, new equilibrium is obtained at a higher price level. When the price level rises, more producers would find it profitable to provide the good, which increases the quantity supplied. Since the producers' surplus is the area above the supply curve, but below the price and up to the equilibrium quantity, an increase in price causes an increase in producers' surplus.