Suppose a competitive market is in equilibrium at price P' and quantity Q'. If the demand curve becomes less elastic, but the same price-quantity equilibrium is maintained, what happens to consumer and producer surplus?
A) Both PS and CS increase.
B) CS increases and PS decreases.
C) CS increases and PS remains the same.
D) Both CS and PS decrease.

Question

Quizplus · Accepted Answer

When the demand curve becomes less elastic, consumers are less sensitive to price changes, meaning they are willing to pay more for the same quantity. This increases consumer surplus because the area under the demand curve and above the price increases. Producer surplus remains the same because the price-quantity equilibrium is maintained, indicating that the cost to producers and the market price have not changed.

Suppose a Competitive Market Is in Equilibrium at Price P