Consumer surplus and price elasticity of demand

Consumer surplus and price elasticity of demand

Inelastic Demand means fixed demand ( demand does not changes with a change in price).
When demand is inelastic, there is a greater potential of consumer surplus because there are some consumers who are willing to pay a higher price to consume that product. Whatever the price, the quantity demanded remains the same.


Inelastic Demand means consumers are willing to pay a higher price for buying the commodity.
Here,Consumers are willing to pay P1 for Q1 quantity of commodity.
But they actually pay P.
Here,triangle PP1AE is the consumer surplus

Elastic Demand means flexible demand (demand changes with a change in price, law of demand follows).

When the demand for a good or service is perfectly elastic, consumer surplus is zero because with the increase in price of the commodity, the demand would decrease and vice versa. And would reduce the consumer surplus.


Here P is the the market price and
P1 is the price the consumer is willing to pay.
Now, suppose the price increases From P to Pn.
With the increase in price from P to Pn, Consumer surplus falls from PnPBA to PnPB1A1.


Elastic Demand means consumers are not willing to pay a higher price for buying the commodity.
With the increase in small Price, Demand will fall much more than proportion.
Here, Triangle PP1AB is the consumer surplus.

Change in Consumer Surplus: Price Increase

Consumer surplus = Amount a consumer is willing to pay – amount he actually pays

Here P is the the market price and
P1 is the price the consumer is willing to pay.
Now, suppose the price increases From P to Pn.
With the increase in price from P to Pn, Consumer surplus falls from PnPBA to PnPB1A1.




2 comments:

Vin Sum said...

make correction in the graph..A1B1 miplaced

Vin Sum said...

make correction in the graph..A1B1 miplaced