1.2.8 Consumer & Producer Surplus

Question 1

Consumer surplus

Answer 1

the difference between the amount consumers are willing to pay an the price they actually pay

Question 2

Producer surplus

Answer 2

the difference between the amount producers are willing to sell a good for and the price they actually receive

Question 3

Consumer surplus on diagram

Answer 3

This is illustrated by the difference between the demand curve (amount they are willing to pay) and the market equilibrium (the amount they actually pay)

• (area above the market price and below the demand curve)
• Consumers pay price P1 and demand a quantity of Q1 this is shown by the square outline
• The net gain to the consumer is the triangle.

Question 4

Why does consumer surplus generally decline with extra units consumed?

Answer 4

Due to diminishing marginal utility

Question 5

Inelastic demands curves…

Answer 5

gives a larger consumer surplus since consumers are willing to pay a much higher price to consume the good

Question 6

High consumer surplus means

Answer 6

more willingness to pay for the good at a higher price

Question 7

Producer surplus on diagram

Answer 7

This is shown by the difference between the supply curve (the amount they are willing to sell for) and the market equilibrium price (the amount they sell for)
- (area below the market price and above the supply curve)

Question 8

High producer surplus

Answer 8

This is caused by a right shift from the supply curve or a right shift from the demand curve which could be due to lower average production cost so market price decreases and producer surplus increases

Question 9

How will changes in supply and demand affect the size of the producer?

Answer 9

• Low price means high demand meaning low supply so producers will increase their prices (increased producer surplus)
• High price means low demand meaning higher supply so producers will to lower their prices (decreased producer surplus)

Question 10

How will changes in supply and demand affect the size of the consumer?

Answer 10

• Low price means high demand meaning low supply so consumers are more likely to buy (increase consumer surplus)
• High price means low demand meaning high supply so consumers are less willing to buy (decreased consumer surplus)

Question 11

What causes consumer surplus to increase?

Answer 11

Low price means high demand meaning low supply so consumers are more likely to buy

Question 12

What causes consumer surplus to decrease?

Answer 12

High price means low demand meaning high supply so consumers are less willing to buy

Question 13

What causes producer surplus to increase?

Answer 13

Low price means high demand meaning low supply so producers will increase their prices

Question 14

What causes producer surplus to decrease?

Answer 14

High price means low demand meaning higher supply so producers will to lower their prices