Microeconomics (2nd Edition) (Pearson Series in Economics)
Microeconomics (2nd Edition) (Pearson Series in Economics)
2nd Edition
ISBN: 9780134492049
Author: Daron Acemoglu, David Laibson, John List
Publisher: PEARSON
Question
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Chapter 7, Problem 1Q
To determine

The effect of change in the elasticity of demand on social surplus.

Expert Solution & Answer
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Explanation of Solution

The Elasticity of demand states the sensitivity of change in quantity demanded due to a change in price. Consumer surplus refers to the difference between the price that consumer is willing to pay and price that they actually pay. Producer surplus refers to the difference between the price at which a producer is willing to supply and the price they actually receive.

Social surplus is the sum total of both consumer surplus and the producer surplus. The effect of elasticity can be seen in the below diagram.

Microeconomics (2nd Edition) (Pearson Series in Economics), Chapter 7, Problem 1Q , additional homework tip  1

In part (a) of the above diagram, DD is the demand and elastic demand curve, SS is the supply curve, and the equilibrium price is where DD and SS intersect. The consumer surplus is area between the demand curve and above the market price. As the elasticity of demand increases, consumer surplus also increases as shown in part ( b ) of the diagram.

So, if the elasticity of demand is higher, consumer surplus will be lower as what a consumer is willing to pay becomes equal to what they actually pay.

Thus, the social surplus will also be lower as it consists of consumer surplus.

Similarly,

Microeconomics (2nd Edition) (Pearson Series in Economics), Chapter 7, Problem 1Q , additional homework tip  2

DD is the demand curve, SS is the elastic supply curve and the equilibrium price is where DD and SS intersect. Producer surplus is calculated between the price and above the supply curve, which means the higher the elasticity of supply, the lower is the producer surplus which will decrease social surplus. As the elasticity of supply increases, producer surplus also increases as shown in part ( b ) of the diagram, which will increase social surplus.

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