Economics.A plant disease in South Australia damages the lemon crop.

Question

What happens to consumer surplus in the market for lemons? What happens to consumer surplus in the market for lemonade? Illustrate your answer with diagram.

Answer 1

Since there is negative supply shock, supply curve will shift left, thus reducing consumer surplus on lemon market (less quantity will be traded and for higher price).

The same situation will be faced by lemon lemonade market - but effect will be a bit less because lemon lemonade has many substitutes - thus relative fall in consumer surplus will be less than on lemon market.

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Supply wil shift from S1 to S2

Consumer surplus will fall from A+B+C to A (loosing B+C)