The cost of producing flat-screen TVs has fallen over the past decade. Let's consider some implications of this fact. a. Draw a supply-and-demand diagram to show the effect of falling production costs on the price and quantity of flat-screen TVs sold. b. In your diagram, show what happens to consumer surplus and producer surplus. c. Suppose the supply of flat-screen TVs is very elastic. Who benefits most from falling production costs - consumers or producers of these TVs?

Consumer surplus is the difference between the amount consumers are willing to pay for a good or service and the amount they actually pay. In the context of the flat-screen TV market, as production costs decrease, the supply of TVs increases, leading to a lower market price.

Suppose initially, consumers were prepared to pay a higher price (P1), but as production costs fall, the market price reduces to P2. The consumer surplus is represented by the area above the new market price and below the demand curve. This area increases with the falling price, meaning that consumers' overall satisfaction and perceived value have risen as they are able to purchase TVs at a more affordable rate.

• In the supply-and-demand diagram, this increase in consumer surplus is visually depicted as a larger shaded area above P2 and below the demand curve after the decrease in production costs takes effect.

Producer surplus is the difference between what producers are actually paid for a good compared to what they were willing to accept. In the instance of falling production costs for flat-screen TVs, the producers are willing to supply more at every price level, meaning the supply curve shifts.

When the supply curve shifts from S1 to S2, it shows that producers can offer the TVs at a lower price. The new equilibrium price P2 is lower, but the quantity sold increases to Q2, which may result in a larger overall producer surplus, particularly if the decrease in production costs significantly exceeds the drop in selling price.

• The gain in producer surplus, following a decrease in production costs, is depicted as the area between the two supply curves (S1 and S2) from the old price level P1 to the new level P2.

It's crucial to understand that while each unit sells for less, the decline in production costs can lead to a more than proportional increase in volume sold, which compensates for the lower price per unit.

Elasticity of supply measures how much the quantity supplied of a good responds to a change in the price of that good. A very elastic supply, as in the case of flat-screen TVs, means that producers can easily and cost-effectively increase production in response to a fall in costs.

When supply is very elastic, the supply curve is almost horizontal, indicating that even tiny price changes lead to large changes in quantity supplied. In such scenarios, the reduction in production costs leads to a substantial decrease in price and a significant increase in quantity sold.

• Regarding who benefits most from very elastic supply, consumers tend to gain more since the price drops considerably, often translating to a substantial increase in consumer surplus.
• The magnitude of the benefit to consumers versus producers is dependent on how quickly and efficiently producers can adjust their production to cost changes relative to the consumers' willingness to purchase more at lower prices.