1.2.8 Consumer and producer surplus

Question 1

Explain the relationship between consumer surplus and PED.

Answer 1

1. When demand for a good or service is perfectly elastic, consumer surplus is zero because the price
   that people pay matches what they are willing to pay.
2. In contrast, when demand is perfectly inelastic, consumer surplus is infinite. Quantity demanded does
   not respond to a price change. Whatever the price, the quantity demanded remains the same.
3. The majority of demand curves are downward sloping. When demand is price inelastic, there is a
   greater potential consumer surplus because there are some buyers willing to pay a high price to
   consume the product.

Question 1

Explain consumer surplus

Answer 1

Consumer surplus is the difference between the maximum that consumers are willing and able to pay for a good or service and the total amount that they actually do pay. On a demand and supply diagram, it is represented
by the area underneath the demand curve and above the market price. Consumer surplus rises or falls as the
market price for a good or service changes

Question 2

Show what consumer surplus look like on elastic and inelastic PED.

Answer 2

Question 3

Show how Consumer surplus rises or falls as the market price for a good or service changes

Answer 3

Question 4

Explain producer surplus

Answer 4

Producer surplus is the difference between the price producers are willing and able to supply a product for
and the price they get in the market. Producer surplus is shown by the area above the supply curve and below
the price. Higher prices provide an incentive to for businesses to expand supply. This is due to the profit
motive.

Question 5

Show how producer surplus looks like on inelastic and elastic PES.

Answer 5

Question 6

Show how producer surplus rises or falls as the market price for a good or service changes

Answer 6

Question 7

Show consumer and producer surplus on one graph

Answer 7