Could some please explain in layman’s terms why consumer surplus apparently increases (based on Q8 in book 2, SchwStudySession 4) when “the demand (marginal benefit) curve becomes less elastic, if the equilibrium price and q. remain unchanged”? Many thanks in advance.
If you draw the curves you will easily that this is true, but in layman’s terms when demand is very elastic, the price you pay for the first item is not high (because you wouldn’t buy at high prices…that’s why demand is very elastic). But when demand is very inelastic, you are willing to pay any price to get the item. Therefore, at the market equilibrium price (assuming P and Q unchanged) you have saved a lot of money when demand was inelastic, i,.e., you did not have to pay all those high early prices. Not entirely for the layman, but should be good enough for layCFA.
Some intro: The law of demand says that demand is inverse proportional to price: the lower the price, the higher the demand or vice versa, the higher the price, the lower the demand. Elasticity of demand is determined as percentage change in demand, caused by the percentage change in price: When: 1% change in price determines 1% change in demand the demand is unit elastic, 1% change in price determines more than 1% change in demand the demand is elastic 1% change in price determines less than 1% change in demand the demand is inelastic Now, if demand becomes more and more inelastic, it means that % changes in price determine a smaller and smaller % change in demand. If you keep the price constant, and the quantity constant, an inelastic demand indicates that prior to reaching the equilibrium Price-Quantity, % change in price was larger than % change in quantity demanded, which would be equivalent to a steeper demand curve – it passes through the same equilibrium point price-quantity, but has a more abrupt slope. Since consumer surplus is the area determined by the Price vertical as, the demand curve and the horizontal quantity, and the demand curve intersects the Price ax upper than in the case of an elastic demand, than the consumer surplus is larger. Just try to draw the demand-supply curves and you’ll see it immediately.
Thanks guys - this is really useful. Good luck!