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 is represented as the area between the demand curve and the price line, up to the quantity of goods purchased.
When the demand for a good increases while the supply remains unchanged, several effects take place:
- Increase in the Price:
If demand for a good increases, the demand curve shifts to the right. This leads to a higher equilibrium price, because there is more competition among buyers for the same quantity of goods. With the price rising, the price consumers are paying for the good is higher. - Change in Quantity:
As demand increases and the price rises, the quantity sold typically increases as well. More consumers are willing to purchase at the higher price, which results in an increase in the quantity of goods traded in the market. - Impact on Consumer Surplus:
Consumer surplus is represented by the area between the demand curve and the price line. When demand increases, this area expands in two ways:
- Some consumers are willing to pay higher prices for the same good, and they still make purchases, which contributes to the increase in surplus.
- New consumers enter the market, and even though they are paying a higher price, they still receive some surplus because their willingness to pay exceeds the price they pay.
Thus, as demand increases, the overall area representing consumer surplus grows, even though the price is higher, because more consumers are willing to pay higher prices. The increase in quantity and the added consumers result in more surplus overall.
While the price increase may diminish surplus for some individual consumers (those who have to pay higher prices), the overall effect is an increase in the total consumer surplus due to the larger number of transactions and consumers benefiting from the market. Therefore, consumer surplus increases when demand increases and supply remains unchanged.