Question

Suppose that a consumer is consuming 10 units of a discrete good and the price increases from \(\$ 5\) per unit to \(\$ 6 .\) However, after the price change the consumer continues to consume 10 units of the discrete good. What is the loss in the consumer's surplus from this price change?

Short answer

The loss in consumer surplus is \$10.

Step-by-step solution

Understand Consumer Surplus

Consumer surplus is the difference between what consumers are willing to pay for a good and what they actually pay. It represents the economic benefit or satisfaction gained by consumers from purchasing goods.

Calculate Initial Consumer Expenditure

Initially, the consumer buys 10 units of the good at the price of \(\\(5\) per unit. Thus, the initial expenditure is \(10 \times 5 = \\)50\).

Calculate New Consumer Expenditure

After the price increase to \(\\(6\) per unit, the consumer still buys 10 units. So, the new expenditure is \(10 \times 6 = \\)60\).

Compute the Loss in Consumer Surplus

The change in consumer surplus is the difference between the new and initial expenditures. Calculate this as follows: New expenditure \(60 - 50 = 10\). Thus, the loss in consumer surplus is \$10.

Key concepts

Discrete Good

A discrete good is an item that can be measured in distinct units, such as apples, books, or cars, unlike something continuous like electricity or gasoline. Discrete goods are typically sold in whole numbers, which makes every unit count as a separate entity.
When consumers purchase discrete goods, their purchasing decision for each additional unit is based on the utility or satisfaction gained from that single unit.

• Discrete goods can easily show variations in demand.
• The consumption choices become clearer as each unit is independent.

In the exercise, the consumer is buying 10 distinct units of a discrete good. This allows clear calculation of expenditures and helps in analyzing changes, such as price hikes, on a per unit basis.

Price Change

A change in the price of a good can impact a consumer's purchasing decisions and their overall satisfaction. In economic terms, a price change acts as a signal to both consumers and producers.
For consumers, higher prices typically mean reassessing their need or want for the good.

• When prices rise, some might choose to buy fewer units or find alternatives.
• Price changes provide critical feedback in a market economy.

Interestingly, however, in this exercise, despite a price increase from \(\\(5\) to \(\\)6\), the consumer continues to purchase 10 units of the discrete good. This indicates that the consumer values each unit enough to absorb the higher cost without changing their consumption quantity.

Consumer Expenditure

Consumer expenditure is the total amount of money spent by consumers on goods and services. For discrete goods, this is simply the product of the number of units purchased and the price per unit.

• Initial expenditure: \(10 \, \text{units} \times \\(5 \, \text{per unit} = \\)50\)
• New expenditure after the price change: \(10 \, \text{units} \times \\(6 \, \text{per unit} = \\)60\)

By comparing these expenditures, one can understand how a price change affects spending. In this case, the consumer's expenditure increased by \(\$10\) due simply to the price increase, even though the number of goods purchased remained the same.

Economic Benefit

The economic benefit for consumers is often reflected in terms of consumer surplus, which measures how much consumers benefit from being able to purchase goods at market prices. Consumer surplus presents the difference between what consumers are willing to pay versus what they actually pay.
When the price of a good increases, the consumer surplus generally decreases because consumers have to pay more without necessarily getting more value.

• Initial scenario: consumer surplus before price rise.
• Post-price change: loss in consumer surplus due to higher spending with no added benefit.

In the given exercise, the rise in price from \(\\(5\) to \(\\)6\) per unit results in a \(\$10\) reduction in consumer surplus, which is a direct measure of the lost economic benefit or utility for the consumer.