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:
a. Decreases.
Explanation:
Consumer surplus is the difference between what consumers are willing to pay for a good and what they actually pay. It is represented graphically as the area between the demand curve and the price level, above the equilibrium price.
When demand increases while supply remains unchanged, the demand curve shifts to the right. This leads to a new equilibrium where both the price and quantity of the good increase. Since the supply curve remains the same, the higher demand puts upward pressure on prices.
As prices increase, consumer surplus decreases for the following reasons:
- Higher Prices Reduce Consumer Surplus: Since consumers now have to pay a higher price for the good, the difference between their willingness to pay and the actual price shrinks, leading to a reduction in consumer surplus.
- Some Consumers Exit the Market: At the higher price, some consumers who were previously able to purchase the good at the lower price can no longer afford it. These consumers lose all their consumer surplus.
- New Consumers Enter at a Higher Price: Although more consumers may now be purchasing the good due to increased demand, they are doing so at a higher price, reducing the overall benefit they receive relative to what they would have gained at a lower price.
Overall, while total market transactions increase, the rise in price reduces consumer surplus. The portion of consumer surplus lost is often transferred to producers as producer surplus, because sellers now receive a higher price per unit sold. However, from the perspective of consumers, their surplus decreases.
Thus, when demand increases while supply remains unchanged, consumer surplus decreases as prices rise.