Innovation, Parallel Shifts of Supply, and Welfare

This article examines the impact of parallel supply shifts that cause supply to transition from elastic to inelastic on consumer, producer, and total surplus. We show that parallel rightward shifts of the supply curve cause consumer surplus and total surplus to increase unambiguously. On the other hand, producer surplus increases, reaches a maximum in the inelastic portion of both the demand and supply curves and then declines. This implies that innovations of this sort eventually result in consumers appropriating a higher share of total surplus. Finally, the maximum points for various producer surplus curves fall on a line which begins at the highest point of the total revenue curve and ends at the lower right corner of the total revenue curve.