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Question
Microeconomics
Posted 5 months ago
Under what conditions will total economic surplus change the most in a market as a result of a change in demand?
Choose 1 answer:
(A) When supply is very elastic and demand is very inelastic.
(B) When supply is very inelastic and demand is very elastic.
(c) When supply is very elastic and demand is very elastic
D When supply is perfectly inelastic and demand is elastic
(E) When supply is very inelastic and demand is very inelastic
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Answer from Sia
Posted 5 months ago
Solution
a
Definition of Total Economic Surplus: Total economic surplus is the sum of consumer surplus and producer surplus in a market. It represents the total benefit to society from the production and consumption of goods and services
b
Impact of Elasticity on Surplus: The elasticity of supply and demand affects how much the quantities supplied and demanded respond to changes in price. When demand or supply is elastic, a small change in price leads to a large change in quantity. Conversely, when demand or supply is inelastic, a change in price leads to a small change in quantity
c
Change in Demand: When there is a change in demand, the new equilibrium price and quantity will depend on the elasticities of both supply and demand. The total economic surplus will change the most when the quantities change significantly, which occurs when both supply and demand are elastic
d
Analysis of Options:
- (A) When supply is very elastic and demand is very inelastic, the quantity supplied will change significantly, but the quantity demanded will not change much.
- (B) When supply is very inelastic and demand is very elastic, the quantity demanded will change significantly, but the quantity supplied will not change much.
- (C) When supply is very elastic and demand is very elastic, both the quantity supplied and the quantity demanded will change significantly.
- (D) When supply is perfectly inelastic and demand is elastic, the quantity supplied will not change at all, but the quantity demanded will change significantly.
- (E) When supply is very inelastic and demand is very inelastic, neither the quantity supplied nor the quantity demanded will change much
e
Conclusion: The total economic surplus will change the most when both supply and demand are very elastic, as this will result in the largest changes in quantities and thus the largest changes in consumer and producer surplus
Answer
(C) When supply is very elastic and demand is very elastic
Key Concept
Elasticity of supply and demand
Explanation
The total economic surplus changes the most when both supply and demand are very elastic because this leads to significant changes in quantities, maximizing the changes in consumer and producer surplus.
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