Finance and the Economy · Seminar 3 · Elasticity
Keep the supply curve fixed and pivot the demand curve through the same equilibrium. The shaded triangle above the price is consumer surplus: watch it grow as demand becomes less elastic and vanish when demand is perfectly elastic. Question 6, from Introduction to Economics (Osadiya, ch. 9).
Consumer surplus
PED at equilibrium
Producer surplus
The business point. Consumer surplus is the gap between what buyers would pay and what they do pay. The larger that gap, the more a firm can extract through price rises, differential pricing or dynamic pricing. With elastic demand the gap is small and the firm’s pricing power is limited.
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