Question

If the price of a product decreases, this will result in which combination of the following?

A. Consumer surplus will increase while producer surplus will increase
B. Consumer surplus will increase and producer surplus will decrease
C. Producer surplus will decrease and consumer surplus will decrease
D. Producer surplus will not change and consumer surplus will increase
E. Producer surplus will decrease and consumer surplus will not change

Answer 1

If the price of a product decreases, consumer surplus will increase and producer surplus will decrease. This happens because consumers pay less for more value, enlarging their surplus, while producers earn less per unit, reducing theirs.

Step-by-step explanation:

When the price of a product decreases, consumer surplus will generally increase because consumers are getting more value for a lower price. Meanwhile, producer surplus will decrease because producers are receiving less revenue for each unit sold. Therefore, option B is correct: Consumer surplus will increase and producer surplus will decrease.

Consumer surplus is the difference between what consumers are willing to pay for a good or service and what they actually pay. So, when prices drop, this surplus increases. On the other hand, producer surplus is the difference between what producers are willing to accept for a good or service and the actual price they receive. With a price decrease, the surplus they receive on each unit sold is reduced.