Answer to Question #174789 in Microeconomics for Bharti

Question

What is effect on producer surplus if taste changes in favor of organic food. Explain it 

diagrammatically. Will it affect producer surplus in the market for organic food?

Answer 1

The difference between the price at which producers are willing to sell a product based on their costs and the market equilibrium price is termed as producer surplus.

If taste changes in favor of organic foods then producer surplus increases along with price and demand for organic foods.

Since both demand and supply have shifted to the right, the resulting equilibrium quantity of organic foods is undeniably higher, but the price will only fall when supply exceeds demand.

The demand curve has shifted right, and the supply curve has moved up, as producers have responded to higher prices by supplying a larger quantity. It is shown by movement of the producer surplus from the areas shaded P1BA to P2CA.