How does elasticity effect consumer surplus and producer surplus? Ex. If the equilibrium price is elastic...

How does elasticity effect consumer surplus and producer surplus? Ex. If the equilibrium price is elastic and equilibrium demand is inelastic

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Expert Solution

Elasticity is the measurement of the percentage change of one economic variable in response to a change in another.When the value of elasticity is greater than 1, it means that the demand for the good or service is affected by the price. A value that is less than 1 suggests that the demand is insensitive to price, or inelastic. Inelastic means that when the price goes up, consumers’ buying habits stay about the same, and when the price goes down, consumers’ buying habits also remain unchanged.If elasticity is zero it is known as perfectly inelastic. If elasticity = 0, then it is said to be 'perfectly' inelastic, meaning its demand will remain unchanged at any price.

Consumer Surplus is the difference between the price that consumers pay and the price that they are willing to pay.

Producer Surplus is the difference between the price a firm receives and the price it would be willing to sell it at.

Consumer surplus for a product is zero when the demand for the product is perfectly elastic.In such cases sellers will increase their prices to convert the consumer surplus to the producer surplus.Aso with the elastic demand the small change in price will result in a large change in demand.

Price elasticity of supply is inversely related to producer surplus.If supply is completely elastic then it is drawn as horizontal line and producer surplus is zero. If supply is completely inelastic then it is drawn as vertical line and producer surplus is infinite.

Example: If the price is elastic and demand is inelastic it means even a large change in price doesnt affect the demand of the commodity. It is majorly the case of necessities that even if the price will go up then people do buy commodities at that price. However they do try to find the substitues for that good that are available at comparitively low prices.

Rahul Sunny answered 10 months ago

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