Question

In: Economics

Ceteris paribus, a decrease in the demand for soda leads to:

A a decrease in the price of soda and a decrease in producer surplus.

B a decrease in the price of soda and an increase in producer surplus.

C an increase in the price of soda and a decrease in producer surplus.

D an increase in the price of soda and an increase in producer surplus.

Expert Solution

Under the ceteris paribus ( other thing being equal ) assumption, a decrease in demand for soda leads to :

A decrease in the price of soda and a decrease in producer surplus ( Option - A )

As you can see in the figure above,

At first, the initial equilibrium price of soda was = P₁

and the initial equilibrium quantity of soda was = Q₁

Here, the initial producer surplus( producer surplus is the area below the price and above the supply curve )was equal to the area of the triangle OP₁A

But, as we have a decrease in the demand for soda, the demand curve shifts to the left from D₁ to D₂.

Here, the new equilibrium price of soda was = P₂

and the new equilibrium quantity of soda was = Q₂

Here, the producer surplus decreases from the area of triangle OP₁A to becoming equal to the area of triangle OP₂B

That's why we clearly see that the price falls ( from P₁to P₂ ), and we also observe a decrease in the producer surplus ( from OP₁A to OP₂B )

Therefore, when there is a decrease in demand for soda, it leads to

A decrease in the price of soda and a decrease in producer surplus ( Option - A )

Rahul Sunny answered 2 years ago

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