The effect of change in the
Explanation of Solution
The Elasticity of
Social surplus is the sum total of both
In part (a) of the above diagram, DD is the demand and elastic demand curve, SS is the supply curve, and the
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,
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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Chapter 7 Solutions
Microeconomics (2nd Edition) (Pearson Series in Economics)
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Economics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage Learning
