1.2.7 Consumer and producer surplus

Question 1

Consumer surplus

Answer 1

The difference between the price consumers are willing to pay for a good and the actual market price.
-> It shows the welfare gained by consumers for buying the good.

Question 2

Producer surplus

Answer 2

The difference between the price producers are willing to supply a good for and the actual market price.
->It shows the welfare gained by consumers for supplying the good.

Question 3

Consumer surplus and price elasticity of demand

Answer 3

When demand is relatively price elastic (PED>1), consumer surplus will be low.

When demand is relatively price inelastic (PED<1), consumer surplus will be high.

Question 4

Producer surplus and price elasticity of demand

Answer 4

When supply is relatively price elastic (PES>1), producer surplus will be low.

When supply is relatively price inelastic (PES<1), producer surplus will be high.