Which of the following is not true when the price of a good or service falls?
a. Buyers who were already buying the good or service are better off.
b. Some new buyers, who are now willing to buy, enter the market.
c. The total consumer surplus in the market increases.
d. The total value of purchases before and after the price change is the same.
The correct answer and explanation is :
The correct answer is:
d. The total value of purchases before and after the price change is the same.
Explanation:
When the price of a good or service falls, several effects take place in the market.
- Existing buyers benefit (Option a is true)
Buyers who were already purchasing the good at the higher price now get it for less. Since they would have paid the higher price but are now paying less, their consumer surplus (the difference between what they were willing to pay and what they actually pay) increases. - New buyers enter the market (Option b is true)
A lower price makes the good more affordable, attracting new buyers who were previously unwilling or unable to buy at the higher price. These new buyers add to the overall demand, further increasing consumer surplus. - Total consumer surplus increases (Option c is true)
Consumer surplus consists of the gains from trade for all buyers. Since both existing and new buyers benefit from the price drop, total consumer surplus in the market increases. - Total value of purchases may change (Option d is false)
The total value of purchases is calculated as Price × Quantity Sold. When the price drops, quantity demanded usually increases. However, the total revenue (total spending in the market) depends on whether demand is elastic or inelastic. If demand is elastic, the increase in quantity demanded more than offsets the price decrease, and total revenue rises. If demand is inelastic, total revenue decreases because the percentage drop in price is larger than the percentage increase in quantity demanded. Therefore, it is incorrect to say that the total value of purchases remains the same—it depends on the elasticity of demand.
Thus, the incorrect statement is option d, making it the right choice for this question.