2.5 Consumer and Producer surplus

Question 1

What is the consumer surplus?

Answer 1

This is the difference between the price the consumer is willing and able to pay and the price they actually pay.

Question 2

Where can you see it on a graph?

Answer 2

It is always the area above above the market price and below the demand curve

Question 3

How does consumer surplus change?

Answer 3

Due to the law of DMU, consumer surplus generally declines with extra units consumed. This is because the extra unit generates less utility than the one already consumed.

Question 4

How does elasticity affect consumer surplus

Answer 4

Inelastic demand gives a larger consumer surplus. This is as consumers are willing to pay a higher price to consume the good

Question 5

What increases/decreases consumer surplus?

Answer 5

A shift in demand can increase consumer surplus. A shift left of supply would decrease consumer surplus due to higher costs of production, and market price will increase

Question 6

What is producer surplus?

Answer 6

This is the difference between the price the producer is willing to charge and the price they actually charge

Question 7

Where can you see it on a graph?

Answer 7

It is always the area below the market price and above the supply curve

Question 8

What increases/decreases producer surplus?

Answer 8

Shifting the supply right would lead to lower average production costs. Market price decreases and producer surplus increases. This could also be due to an increase in demand

Question 9

What is economic welfare?

Answer 9

This is the total benefit society receives from an economic transaction. It is the producer surplus + consumer surplus