Question

In any market, when the demand for a product decreases, what happens to the consumer and producer surplus?

1) There will be no change in either the consumer or producer surplus.
2) The producer surplus increases.
3) The consumer surplus decreases also.
4) The consumer surplus increases.

Answer 1

When the demand for a product decreases, both the consumer surplus and producer surplus decrease.

Step-by-step explanation:

Consumer surplus is the gap between the price that consumers are willing to pay, based on their preferences, and the market equilibrium price. Producer surplus is the gap between the price for which producers are willing to sell a product, based on their costs, and the market equilibrium price. When the demand for a product decreases, it means that consumers are willing to pay a lower price for the product. As a result, the market equilibrium price decreases and both the consumer surplus and producer surplus decrease.