In each of the following cases, identify whether a competitive firm's producer surplus will increase, decrease, or remain unchanged

Question

i. The demand for the product increases
ii. The firm's marginal cost of production increases
iii. The market price of the product falls

Answer 1

i. An increase in the demand for a product will shift the market demand curve upward. This will cause an increase in the market price, which in turn will shift the demand curve faced by the firm (also the equilibrium price) upward. This upward shift in the equilibrium price will cause the area between the supply curve and the price to increase. As a result, producer surplus will increase.
ii. An increase in the firm's marginal cost of production will shift its supply curve to the left. With market price remaining unchanged, this will reduce the area above the supply curve and below the equilibrium price, causing producer surplus to fall.
iii. A decline in price will reduce the difference between the price that the consumer pays and how much it takes to produce the good. This will reduce producer surplus for the firm.