Micro Foundations · intro
What moves on the Consumer & Producer Surplus diagram
Lower demand at every price reduces both equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change. price and quantity, shrinking consumer and producer surplusproducer surplusThe gap between the price sellers receive and the minimum they would have accepted. and the total gains from trade.
The two triangles together measure the total gains from trade in this market.
A recession hits and buyers pull back at every price.
Demand shifts left: price falls, quantity falls, and both surplus areas contract.
Fewer mutually beneficial trades happen, and the value society gets from this market drops.
Examiners ask this as: demand falls, recession, surplus shrinks, less trade, consumer surplus falls.
Other scenarios on Consumer & Producer Surplus