Economics Consumer Surplus And Producer Surplus Questions Medium
A decrease in supply leads to an increase in deadweight loss. Deadweight loss refers to the loss of economic efficiency that occurs when the equilibrium quantity of a good or service is not maximized. It is caused by market inefficiencies such as taxes, subsidies, price controls, or externalities.
When supply decreases, the equilibrium price of the good or service increases. This higher price reduces the quantity demanded by consumers, resulting in a decrease in consumer surplus. Consumer surplus is the difference between the maximum price consumers are willing to pay for a good and the actual price they pay.
Additionally, a decrease in supply also leads to a decrease in producer surplus. Producer surplus is the difference between the minimum price producers are willing to accept for a good and the actual price they receive. As the supply decreases, producers are unable to sell as much at the higher price, reducing their surplus.
The combined decrease in consumer and producer surplus due to a decrease in supply results in an increase in deadweight loss. This is because the decrease in quantity traded in the market represents a loss of potential gains from trade. Deadweight loss represents the inefficiency in the allocation of resources and the overall welfare loss to society.
In summary, a decrease in supply leads to an increase in deadweight loss as it reduces both consumer and producer surplus, resulting in a loss of potential gains from trade and overall market inefficiency.