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.
The correct answer and explanation is :
The correct answer is:
c. The total consumer surplus in the market increases.
Explanation:
To understand why c is not true, let’s first define the terms involved:
- Consumer Surplus: This refers to the difference between what consumers are willing to pay for a good or service and what they actually pay. In simple terms, it represents the benefit consumers receive from purchasing a product at a price lower than the maximum price they are willing to pay.
Now, let’s break down each statement:
a. Buyers who were already buying the good or service are better off.
When the price of a good or service falls, the buyers who were already purchasing the product are indeed better off. This is because they are now paying less for the same product, which increases their consumer surplus. In essence, they experience a direct benefit in the form of lower prices.
b. Some new buyers, who are now willing to buy, enter the market.
A price drop may make the product more affordable to some individuals who were previously unwilling or unable to purchase it at the higher price. This typically results in an increase in demand, as more consumers find the product attractive at the new, lower price.
c. The total consumer surplus in the market increases.
This statement is not true because while a fall in price does increase the consumer surplus for those buyers already in the market and may bring in new buyers, the increase in total consumer surplus is not always guaranteed. The total change in consumer surplus depends on the elasticity of demand and the magnitude of the price change. In some cases, the market might experience a decrease in overall consumer surplus, especially if the price drop causes a significant reduction in quantity produced, or if the increase in buyers is not sufficient to offset the effect of lower prices. Furthermore, if the price drop is large enough and leads to a decrease in producer surplus, the overall market could experience a net loss in total surplus.
In summary, although falling prices often lead to individual buyers gaining more consumer surplus, the total market surplus could theoretically decrease if other factors, such as reduced producer surplus or lower overall production, are considered. Hence, statement c is not always true.