How does price elasticity of demand and supply affect consumer surplus and producer surplus?

How does price elasticity of demand and supply affect consumer surplus and producer surplus?

The price elasticity of demand and supply affects consumer surplus and producer surplus in the following ways:

1. Price Elasticity of Demand:
- If demand is elastic (PED > 1), a decrease in price will lead to a proportionately larger increase in quantity demanded. This results in a larger consumer surplus as consumers are able to purchase more at a lower price.
- If demand is inelastic (PED < 1), a decrease in price will lead to a proportionately smaller increase in quantity demanded. This results in a smaller consumer surplus as consumers are not as responsive to price changes.

2. Price Elasticity of Supply:
- If supply is elastic (PES > 1), an increase in price will lead to a proportionately larger increase in quantity supplied. This results in a smaller producer surplus as producers have to sell more at a lower price.
- If supply is inelastic (PES < 1), an increase in price will lead to a proportionately smaller increase in quantity supplied. This results in a larger producer surplus as producers are able to sell less at a higher price.

In summary, when demand is elastic and supply is inelastic, consumer surplus increases and producer surplus decreases. Conversely, when demand is inelastic and supply is elastic, consumer surplus decreases and producer surplus increases.