page 6 of 10Source CConsumers who purchase frozen fries from supermarkets have also been affected by the changesin the market for frozen fries. Supermarket Chain 1, one of Country A’s two supermarket chains,has chosen to hold the price of frozen fries at P1 and has also set buyer limits to help availabilityand affordability for customers.(f ) (i) Use the following diagram to identify the impact on both consumer surplus and producersurplus of Supermarket Chain 1’s decision to hold prices at P1. Write your answer in thetable below.Market for frozen fries at supermarket chainsPP2PeP1 P1Sab cd e f gh i j k l DQQ 2Q eQ 1Consumer surplus if price is Pe Consumer surplus if price is P1Producer surplus if price is Pe Producer surplus if price is P1
Question
page 6 of 10Source CConsumers who purchase frozen fries from supermarkets have also been affected by the changesin the market for frozen fries. Supermarket Chain 1, one of Country A’s two supermarket chains,has chosen to hold the price of frozen fries at P1 and has also set buyer limits to help availabilityand affordability for customers.(f ) (i) Use the following diagram to identify the impact on both consumer surplus and producersurplus of Supermarket Chain 1’s decision to hold prices at P1. Write your answer in thetable below.Market for frozen fries at supermarket chainsPP2PeP1 P1Sab cd e f gh i j k l DQQ 2Q eQ 1Consumer surplus if price is Pe Consumer surplus if price is P1Producer surplus if price is Pe Producer surplus if price is P1
Solution
The consumer surplus and producer surplus are areas on the supply and demand graph that represent the difference between what consumers are willing to pay and what they actually pay, and the difference between what producers are willing to accept and what they actually receive, respectively.
If the price is Pe:
- The consumer surplus is the area above the price line (Pe) and below the demand curve (D). In the diagram, this is represented by the area of the triangle formed by points a, b, and e.
- The producer surplus is the area below the price line (Pe) and above the supply curve (S). In the diagram, this is represented by the area of the triangle formed by points e, f, and g.
If the price is P1:
- The consumer surplus is the area above the price line (P1) and below the demand curve (D). In the diagram, this is represented by the area of the triangle formed by points a, b, and d.
- The producer surplus is the area below the price line (P1) and above the supply curve (S). In the diagram, this is represented by the area of the triangle formed by points d, h, and i.
From the diagram, we can see that when the price is held at P1, the consumer surplus increases (as the area of the triangle a-b-d is larger than the area of the triangle a-b-e), while the producer surplus decreases (as the area of the triangle d-h-i is smaller than the area of the triangle e-f-g). This is because consumers are paying less for the product, while producers are receiving less revenue for it.
Similar Questions
Explain the impact of an increase in the price of frozen fries from P0 to P1 on the totalrevenue of processors of frozen fries. Refer to the diagram below in your answer.Demand for frozen fries from family restaurantsQQ 1 Q 0PP1P0abdce f D_________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ (3 marks)
Explain how the price mechanism would impact both producers and consumers to returnthe market for frozen fries to equilibrium.
Source DThe other supermarket chain in Country A, Supermarket Chain 2, must now decide if it will followthe decision of Supermarket Chain 1 to hold the price of frozen fries at P1 and set buyer limits.The following payoff matrix shows the revenue ($billion) that each supermarket chain can makewhen it chooses between:• holding price and setting buyer limits• not holding price and not setting buyer limitsSupermarket Chain 1Hold price andset buyer limitsNot hold price andnot set buyer limitsSupermarketChain 2Hold price andset buyer limits1.92.01.72.3Not hold price andnot set buyer limits2.12.21.82.4(g) (i) Use game theory to explain the likely action of Supermarket Chain 2._____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ (2 marks)(ii) Explain why Supermarket Chain 2 must consider the actions of Supermarket Chain 1when deciding whether to hold prices and set buyer limits._____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ (2 marks)
Owners of family restaurants have reacted to changes in the market for frozen fries in differentways. Some are making their own fries from table potatoes (which are less suitable for fries) andothers have reduced their serving sizes. Both responses have led to a decrease in the frequencyof consumers eating out. Some owners have even been forced to close their restaurants due to areduced number of customers.(e) Explain the likely effects of the changes in the market for frozen fries on the market for mealsat family restaurants. Complete the diagram below to support your answer
Outline why the change in the market for processing potatoes identified in part (b) islikely to affect the market for frozen fries
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