Question

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Why does a reduction in the price of a good increase consumer surplus? Discuss Options Menu: Thread

Answer 1

Suppose initial price is P1 and quantity demanded is Q1. Now the price falls to P2 and quantity rises to Q2. The initial consumer surplus is given by the blue region. After price fall the CS increases to the blue+green+red region.

Reduction in the price of the good increases consumer surplus in two ways:

1) Consumer surplus is the difference between the willingness to pay of a consumer and the price actually paid. So when the price declines, the difference increases and thus the CS increases for the current consumers. This is represented by the green area.

2) When the price falls, consumers who earlier could not afford the good because of higher price can now buy the product. Thus their consumer surplus now is also added thus CS rises. This is represented by red area.

Thus price fall increases consumer surplus.