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minibush3 · Oct 12, 2016, 08:53 AM

Will Both Consumer and Producer Surplus decrease as a result of a decrease in demand? Or is this not possible?

Assuming there is a decrease in demand for travel, I'd like to know how this affects both types of surplus.

Thanks!

smoothy · Oct 12, 2016, 08:54 AM

What do you think and why... since this is a homework question.

minibush3 · Oct 12, 2016, 09:55 AM

Hi Smoothy,

I think that demand would lower the price, which increases consumer surplus, but producer surplus would decrease as quantity demanded exceeds quantity supplied since the price is lower and producers are less willing to sell goods at a lower price. What are your thoughts?

smoothy · Oct 12, 2016, 10:08 AM

How would more demand lower the price? If there is less of something than exists a supply for it... what would happen to the price.. you see it every year with the next "must have" item... what constitutes a surplus... more of a demand, or more of a supply? What happens when you have too much of something? How to you get rid of a surplus of something, what incentives work to make someone want more of something? Think about that and look at what you wrote. Make adjustments and let us know if you see where you were wrong.

minibush3 · Oct 12, 2016, 10:16 AM

Well in this scenario (basically how the market for travel to france changes after the 2015 Paris attacks), I believe that demand would decrease, and since demand is lower, suppliers are willing to lower the price for travel to France so that they are not left with a surplus of goods.

So now that I am thinking about it again (and I thank you for your assistance on this so far), perhaps both consumer and producer surplus will decrease due to the consumers not willing to make purchases and producers find themselves unable to get rid of goods for a lower price.

smoothy · Oct 12, 2016, 10:23 AM

Exactly. You understand it now. Though in the case of tangible goods, a surplus will exist until the existing surplus goes somewhere, creating a lag... certain other things can be added to or taken off the market more quickly. Supply will always be out of sync with demand to a certain degree due to lead time needed to produce the goods which can be significant in many cases. You can relate that to food as well as almost any manufactured item as well.

minibush3 · Oct 12, 2016, 10:27 AM

Ah, understood. I appreciate all the clarification today, many thanks!

smoothy · Oct 12, 2016, 10:28 AM

Your welcome