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.
Thank you!
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$\begingroup$ Draw the basic supply / demand graph. Find the total area for surplus. Also, calculate each type of surplus. Shift the demand curve. Recalculate each of the three measures. Taking differences will tell you what happens to total surplus and relative shares of total surplus. $\endgroup$ – 123 Oct 12 '16 at 16:53
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$\begingroup$ Do you mean that the demand function shifts or that the price rises and demand decreases because of this? $\endgroup$ – Giskard Oct 12 '16 at 17:06
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$\begingroup$ Hi Denesp, I mean that due to a change in consumer tastes, demand decreases as people do not want to travel to Middle East countries (for example) $\endgroup$ – mpastudent Oct 12 '16 at 17:07
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Simply shifting the demand curve down will typically reduce the combined surplus, especially the producer surplus. But you could devise two non-parallel demand curves, one below the other, where consumer surplus rose, for example like this:
If the demand curve fell from the higher to the lower red curve, than the combined surplus would fall by the orange and brown amount while the producer surplus would fall by the green and brown amount. But the consumer surplus could rise, providing that the green amount is larger than the orange amount. You could achieve this without such kinky curves, but it might not be so obvious.
If consumers' tastes (or utilities) change then with a constant budget constraint, demand could increase for other products, raising the combined surplus for those.
