Here is a sample answer to this question "Evaluate the impact of changes in price on consumer surplus".

1. Price Changes
and Consumer
Surplus
A Level Microeconomics
Tutor2u Economics

2. Question: Evaluate the impact of changes in
price on consumer surplus
Consumer surplus measures the
difference between what a consumer is
willing and able to pay for a product
and the price that he/she actually pays.
Price changes can come about because
of changes in the conditions of demand
and supply. But they can also arise from
government interventions in markets
and changes in prices brought about by
adjustments in business objectives.
Some factors increase consumer
surplus, whereas other factors may
cause consumer surplus to fall.

3. Question: Evaluate the impact of changes in
price on consumer surplus
Consider market demand and supply
shown in the diagram. The initial level
of consumer surplus = area AP1B. If
there is an outward shift of supply – for
example caused by an improvement in
production technology or productivity,
then the equilibrium price will fall, and
quantity demanded will expand. This
leads to an increase in consumer
surplus to a new area of AP2C. The
extent of the increase in consumer
surplus depends on whether suppliers
actually do lower their prices.
Price
Quantity
D1
S1
P1
Q1
A
B
S2
P2
Q2
C
Outward shift of supply –
increased consumer surplus

4. Question: Evaluate the impact of changes in
price on consumer surplus
However falling prices does not
necessarily mean that consumer
surplus will increase. For example,
there might have been an inward shift
in the demand curve perhaps caused
by a fall in real disposable income. This
is shown in the diagram with demand
shifting inwards from D1 to D2 which
leads to a fall in both equilibrium price
and quantity. The area of consumer
surplus drops from AP1B to EP2D.
Price
Quantity
D1
S1
P1
Q1
A
B
P2
Q2
D
D2
E
Inward shift of demand – fall in
consumer surplus

5. Question: Evaluate the impact of changes in
price on consumer surplus
Changes in price can also be caused by government
interventions in a market. For example the UK
government recently brought in the Sugar Levy
which taxes manufacturers of drinks with high
sugar content. A tax causes an inward shift of
supply and leads to higher prices and – in theory –
a fall in consumer surplus to AP2C. But this
depends on whether retailers pass on the tax to
consumers which depends on both the price
elasticity of demand and also the strategic
objectives of firms. When demand is price inelastic,
the level of consumer surplus is high and a tax can
cause a large transfer of consumer surplus to the
government.
Price
Quantity
D1
S1
P1
Q1
A
B
Q2
S2
P2
C
Tax on suppliers – lowers
consumer surplus

6. Price Changes
and Consumer
Surplus
A Level Microeconomics
Tutor2u Economics