If the price of oak lumber increases, what happens to consumer surplus in the market for oak cabinets?
a. Consumer surplus increases.
b. Consumer surplus decreases.
c. Consumer surplus will not change; only producer surplus changes.
d. Consumer surplus depends on what event led to the increase in the price of oak lumber.
The correct answer and explanation is :
The correct answer is:
b. Consumer surplus decreases.
Explanation:
Consumer surplus refers to the difference between what consumers are willing to pay for a good and what they actually pay. It represents the benefit or “surplus” that consumers receive when they can buy a product for less than the maximum price they are willing to pay. When the price of oak lumber increases, it directly affects the market for oak cabinets, as oak is a key input in their production.
Here’s how the price increase in oak lumber impacts consumer surplus:
- Increase in Input Costs: Oak lumber is a primary input in the production of oak cabinets. If the price of oak lumber rises, it becomes more expensive for producers to manufacture oak cabinets. As a result, producers will likely pass on some or all of the increased costs to consumers by raising the prices of oak cabinets.
- Price Increase for Consumers: The higher price of oak cabinets means that consumers will have to pay more for the same product, which leads to a reduction in consumer surplus. The area representing consumer surplus on a standard supply and demand graph shrinks because the new higher price means that consumers who were previously willing to pay less than the original price may no longer be able to afford the cabinet, or they may choose to purchase a less expensive substitute.
- Decreased Quantity Demanded: As the price of oak cabinets increases due to the higher cost of oak lumber, the quantity demanded for oak cabinets will generally decrease (following the law of demand). Fewer consumers will be willing to purchase at the higher price, leading to a further reduction in the consumer surplus.
- Overall Effect: The increase in oak lumber prices causes a shift in the supply curve of oak cabinets to the left (indicating a decrease in supply). This results in a higher equilibrium price for oak cabinets and a lower equilibrium quantity, which reduces the total consumer surplus in the market.
Thus, when the price of oak lumber increases, consumer surplus decreases due to higher prices and fewer consumers being able to afford or willing to purchase the cabinets.