Consumer & Producer Surplus Flashcards
(14 cards)
What is Consumer Surplus?
The difference between what consumers are willing and able to pay for a good/service and what they actually pay.
Graphically: Area below the demand curve and above the price line.
What is Producer Surplus?
The difference between the price producers are willing to supply a good/service for and the price they actually receive.
Graphically: Area above the supply curve and below the price line.
Where is Consumer Surplus on a supply & demand diagram?
Found under the demand curve,
Above the market price line,
From Q = 0 up to the equilibrium quantity.
Where is Producer Surplus on a supply & demand diagram?
Found above the supply curve,
Below the market price line,
From Q = 0 up to the equilibrium quantity.
Why is surplus important in welfare analysis?
It helps measure allocative efficiency in markets.
Total surplus (consumer + producer) = total welfare.
The higher the total surplus, the more efficiently resources are being allocated.
What happens to surplus when price changes (e.g. from P1 to P3)?
Consumer surplus falls as price rises.
Producer surplus rises (if price increases), or falls (if price decreases).
Changes in surplus reflect shifts in welfare.
How do we calculate Consumer Surplus on a graph?
Area under the demand curve and above the market price — from 0 up to the equilibrium quantity.
How do we calculate Producer Surplus on a graph?
Area above the supply curve and below the market price — from 0 up to the equilibrium quantity.
What is Society Surplus?
Society surplus = Consumer Surplus + Producer Surplus
It measures total welfare (benefit) in the market.
What happens to CS and PS when supply shifts left?
Price rises
Quantity falls
Consumer Surplus decreases (since buyers pay more)
Producer Surplus may increase or decrease depending on elasticity and cost impact
Society surplus often decreases — possible welfare loss
How can we identify changes in CS and PS on a graph?
Compare the triangles before and after the shift:
CS = area between demand and price line
PS = area between price line and supply curve
Changes in these areas show how market efficiency and welfare are affected.
What happens to Consumer Surplus when demand shifts right?
Demand ↑ → Price ↑ and Quantity ↑
Consumer Surplus usually increases, though it may depend on how steep the price rises
Graphically: larger trapezium under the demand curve and above the new price line
What happens to Producer Surplus when demand shifts right?
Higher price and more quantity sold → Producer Surplus increases
Graphically: area above the supply curve and below the new (higher) price line grows
What shape do CS and PS areas take after shifts?
They often become trapeziums (not just triangles) when the price changes — because the top or bottom edge is now a sloped line instead of flat.
