1.2.8 Consumer and Producer Surplus Flashcards
What is a consumer surplus?
- The difference between the price consumers are willing to pay and the price they actually pay, set by the price mechanism.
- The demand curve shows the price consumers are wiling to pay, and so the difference between the demand curve and the price shows the consumer surplus
What is a Producer Surplus?
- The difference between the price and the supplier is willing to produce their product at and the price they actually produce at, set by the price mechanism.
- The supply curve shows the price suppliers are willing to sell the good for, and so the difference between the supply curve and the the price shows the consumer surplus
Which triangle illustrates consumer surplus?
Top (orange)
Which triangle illustrates producer surplus?
Bottom (purple)
What is the formula for total surplus/net welfare?
Consumer Surplus + Producer Surplus = Total Surplus
Perfectly elastic demand means…
there is no consumer surplus
Perfectly inelastic demand means…
that consumer surplus is infinite
The more inelastic demand…
the higher consumer surplus
When supply is perfectly elastic…
producer surplus is 0
When it is perfectly inelastic….
Producer surplus is infinite.
The more inelastic supply…
the higher producer surplus is likely to be