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Suppose the supply for French bread decreases. Explain what happens to the consumer surplus in the...

  1. Suppose the supply for French bread decreases. Explain what happens to the consumer surplus in the market for French bread. Illustrate your answer with diagrams. (5 points)
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Answer #1

Answer:

Assuming demand remains constant, when supply decreases, it leads to a higher equilibroum price than before, thus decreasing the consumer surplus. In other words, when supply decreases, as a result, the equilibrium price increases and then it leads to a fall in consumer surplus, which is the difference between what the consumer is willing to pay and what he actually pays in accordance with the market price.

Please refer to the following diagram.

When supply decreases from S0 TO S1, price goes up from B TO C.

As a result, the consumer surplus initially which was ABE, becomes ACD now.

I hope you like my answer :)

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