A Change in Price and Consumer Surplus

After you have worked through this section of the learning unit, you should be able to:

  • illustrate and explain with the aid of a diagram what happens to total consumer surplus if the price change

What happens to the total consumer surplus if the price decreases from R4 to, say, R3? According to our demand curve, the quantity demanded increases to 360. Consumer surplus increases because there are new buyers of fried chicken pieces, and existing buyers are paying a lower price. This causes an increase in the total consumer surplus.

In terms of our diagram, the following happens:

At R3, the existing 300 buyers pay less and their consumer surplus therefore increases. This increase in consumer surplus is indicated by the area 3-4-E-H. The increase in consumer surplus because of the new buyers is indicated by the triangle E-H-E1. The total consumer surplus at R3 is therefore given by the triangle 3-8 E1.

The total consumer surplus gives us a measure of the consumers' economic welfare in terms of the goods and services they buy and consume, and the greater the consumer surplus, the greater their economic welfare will be.

Activity

Do the following activity to see if you understand what happens to consumer surplus when the price changes:

The following diagram indicates the market demand for ice cream and the consumer surplus at a market price of R10:

  1. Use the diagram to illustrate what happens to total consumer surplus if the price increases to R15.
  2. Use the diagram to illustrate the consumer surplus lost because fewer people are buying ice cream.
  3. Use the diagram to illustrate the consumer surplus lost because existing buyers are paying a higher price.
Click to see the answer

a. An increase in the price decreases the consumer surplus. The consumer surplus that is lost is indicated by the area 10-15-C-R.

b. The loss in consumer surplus because less people are buying ice cream is the area F-C-R.

c. The consumer surplus lost because existing buyer pay a higher price is the area 10-15-C-F.