Practise using PED and PES to compare changes in consumer and producer surplus after taxes, minimum prices or curve changes, with correctly shaded welfare diagrams.
With the aid of diagrams, explain how consumer surplus is affected by a decrease in the price of a luxury product with many substitutes, and of an essential product with few substitutes.[8]
For Knowledge and Understanding
For correct diagram: Axes correctly labelled: P/Q
(1 mark) Existence of consumer surplus (1 mark)
2 marks maximum
For Application
How consumer surplus is affected by a decrease in the price of a luxury product with many substitutes: elastic PED. (Up to 3 marks) How consumer surplus is affected by a decrease in the price of an essential product with few substitutes: inelastic PED'
(Up to 3 marks)
8
A decrease in the price of a product will increase the consumer surplus as more consumers are willing to pay the lower price.
The extent of this will depend on the price elasticity of demand for a product.
In the case of a luxury product with many substitutes, PED will be elastic.
In the case of an essential product with few substitutes, PED will be inelastic.