When the demand for a good increases and the supply of the good remains unchanged, consumer surplus
a. Decreases.
b. Is unchanged.
c. Increases.
d. May increase, decrease, or remain unchanged.
The correct answer and explanation is :
The correct answer is c. Increases.
Explanation:
Consumer surplus refers to the difference between what consumers are willing to pay for a good and what they actually pay. It measures the benefit consumers receive when they are able to purchase a good at a price lower than the maximum price they are willing to pay.
Now, let’s break down the situation in the question:
- Demand Increases: This means that at each price point, consumers are now willing to buy more of the good than before. An increase in demand is typically represented by a rightward shift of the demand curve.
- Supply Remains Unchanged: This indicates that the quantity of the good that producers are willing to supply at each price does not change. The supply curve remains the same.
When demand increases, the new equilibrium price typically rises (due to higher demand for the same quantity of goods), and the equilibrium quantity also increases, assuming no change in supply.
Now, here’s how the changes affect consumer surplus:
- New Price and Quantity: As the price increases, the area under the demand curve and above the price consumers pay (which represents the consumer surplus) changes. The increase in demand raises the equilibrium quantity and price.
- Consumer Surplus Increases: The increase in price and quantity generally causes the consumer surplus to increase for two reasons:
- The new price might be higher, but the consumers who were already purchasing the good at the old equilibrium price still get the benefit of paying a price lower than their maximum willingness to pay.
- The new quantity at the higher price may also lead to additional consumers entering the market, creating more surplus overall.
Thus, the increase in demand leads to an expansion in the area that represents consumer surplus, causing it to increase.
In summary, when the demand for a good increases and supply remains unchanged, consumer surplus increases because consumers gain more benefit from the good even at a higher price and higher quantity.