LS13- Consumer and Producer Surplus & LS14- DMU

Question 1

Consumer surplus

Answer 1

Extra amount of money consumers are prepared to pay for a good/service above what they actually pay- utility/satisfaction gained from a good/service in excess of the amount paid for it

• top triangle

Question 2

Producer surplus

Answer 2

Extra amount of money paid to producers above what they are willing to accept to supply a good or service- extra earning gained by producer above minimum required for them to supply the good or service

• bottom triangle

Question 3

Surplus and tax burden and subsidy gain

Answer 3

When PED is elastic- burden of tax mostly on producers, most gain of subsidy to producers
When PED is inelastic- burden of tax mostly on consumers, most gain of subsidy to consumers

Question 4

Income effect

Answer 4

Assuming fixed income, income effect means that as price falls, affordability increases, so demand increases

Question 5

Marginal utility

Answer 5

The utility gained from consuming one extra unit of a good/service

Question 6

Diminishing marginal utility

Answer 6

As successive units of a good are consumed, the marginal utility gained from each extra unit will fall