Question

Use the Law of Demand to explain why all consumers must receive a surplus whenever they purchase more than one unit of a product but may receive no surplus if only one unit is bought. Make up a numerical example to illustrate. Provide two reasons why consumer surplus must increase when the price of a product falls?

Explain fully why taxing a product leads to deadweight loss. Use appropriate graphs to explain why the deadweight loss is greater the more elastic the demand for a product. Focus only on the elasticity of demand, not supply.

Governments often claim that they impose high taxes on cigarettes because smoking is bad for your health. They claim that the high taxes are intended to discourage your consumption. Use your understanding of the elasticity of demand to dispute this claim, assuming that cigarettes have a very inelastic demand. Illustrate with a graph. Hint: Very inelastic is not the same as inelastic or perfectly inelastic.

Supposing that Canada and China were the only two countries in the world, why would it be impossible for Canada to import a greater value of goods from China than the value we export to China, even if China produced most goods more cheaply than Canada? Use this example to explain why increasing our imports from China can never create unemployment in Canada

Answer 1

Answer:

    The consumer surplus means that the difference between the willingness to pay and actually pay for the goods and services in the market. When we apply the law of demand in the market, the consumers must receive a surplus, because the Law of demand states that, if the price of a good or service decrease, the consumer demand for the good or service will increase, and vice versa. So, they can buy more goods or services for the same amount of cash. That means all of the consumers get a surplus because they are gaining something more then what they are giving up in terms of cash.

     The consumer’s surplus is the area under the demand curve between the highest price and the equilibrium and the producer surplus is the area above the supply curve between the lowest price and equilibrium price.

Numerical example:

   For suppose, if the price of the good is $5, the consumer can buy 10 units of quantity. By following the Law of demand, with decrease price to $4, the quantity increases to 12 units; because the ability of purchasing power will increase during the change in price. We can explain this situation by using the simple diagram.

                

Price S' S5 CS $4 0 10 12 Quantity

   The light green area in the above diagram shows the increased consumer surplus of the consumer with decrease in the price.