Economics Consumer Surplus And Producer Surplus Questions
When supply is inelastic and demand is elastic, it leads to a larger consumer surplus and a smaller producer surplus.
Inelastic supply means that producers are unable to quickly adjust their quantity supplied in response to changes in price. This results in a higher price for the product, as the quantity supplied cannot meet the increased demand. As a result, consumers are willing to pay a higher price for the product, leading to a larger consumer surplus.
On the other hand, elastic demand means that consumers are highly responsive to changes in price. When demand is elastic, even a small increase in price leads to a significant decrease in quantity demanded. This puts pressure on producers to lower their prices in order to maintain sales. As a result, the producer surplus decreases as they receive a lower price for their product.
Overall, inelastic supply and elastic demand lead to a larger consumer surplus and a smaller producer surplus.