Economics Consumer Surplus And Producer Surplus Questions
The impact of excess demand on consumer surplus and producer surplus is as follows:
1. Consumer Surplus: Excess demand leads to a decrease in consumer surplus. When there is more demand for a product than the available supply, consumers are willing to pay higher prices to secure the limited quantity. As a result, the price of the product increases, reducing the consumer surplus. Some consumers may be priced out of the market altogether, further reducing the overall consumer surplus.
2. Producer Surplus: Excess demand leads to an increase in producer surplus. When there is more demand for a product than the available supply, producers can charge higher prices and still sell all their goods. This allows producers to earn higher profits, resulting in an increase in producer surplus. The higher prices also incentivize producers to increase production, further contributing to their surplus.
In summary, excess demand reduces consumer surplus as prices increase, while it increases producer surplus as producers can charge higher prices and earn more profits.