1.2.8 Consumer and producer surplus

Question 1

The distinction between consumer and producer surplus

Answer 1

consumer surplus is the difference between the price the consumer is willing to pay and the price they actually pay set by the price mechanism

higher consumer surplus => higher consumer utility

producer surplus is the difference between the price the supplier is willing to produce their product at and the price they actually produce at set by the price mechanism

Question 2

The use of supply and demand diagrams to illustrate consumer and producer surplus

Answer 2

light work

Question 3

How changes in supply and demand might affect consumer and producer surplus

Answer 3

a DECREASE in SUPPLY and DEMAND will lead to a FALL in consumer and producer surplus

an INCREASE in SUPPLY and DEMAND will lead to a RISE in consumer and producer surplus

Question 4

community surplus

Answer 4

the total welfare to society is the community surplus, consumer + producer surplus

the price mechanism can be shown to efficiently allocate resources as increasing the welfare of one group will decrease the welfare of another, so community welfare is maximised

any price/output combination will have the same community surplus

as a result the price mechanism fulfils Pareto criterion