Functions Of Price, Consumer And Producer Surplus Flashcards
(4 cards)
What is Producer Surplus?
The difference between what producers are able to supply a good for (supply curve) and the price they actually receive (the market price).
It is a measure of producer welfare.
What is Consumer Surplus?
The difference between the total amount that consumers are able to pay for a good or service (demand curve) and the total they pay (the market price).
It is a measure of consumer welfare.
What are the Functions of Price?
SIGNAL – prices provide key information to buyers and sellers; if the price changes because of a shift in demand, this signals to producers to adjust their output levels; if the price changes because of a shift in supply, this indicates to consumers to re-think how much they will purchase.
INCENTIVISE – higher prices can incentivise producers to extend supply as they anticipate more profit; lower prices can incentivise consumers to extend demand as they pay less for a good yielding the same utility (and vice versa)
RATION – if supply is limited, the price rises, which rations the good to those who are most willing and able to pay;
When may the Functions of Price not work effectively?
Signalling - can fail if there are externalities; if the government imposes a maximum or minimum price; if the price set by producers is not at the equilibrium; if there is imperfect information
Incentivising – may be missing for public goods
Rationing – may not work if the government sets the price
