1.2.8 Consumer and producer surplus

Question 1

consumer surplus

Answer 1

the difference between the price the consumer is willing to pay and the price they actually pay, set by the price mechanism.
- it is the utility or satisfaction gained from a g/s in excess of the amount paid for it.
- For example, if a consumer is willing to pay £18 to watch a movie and the price is £15, their consumer surplus is £3

Question 2

producer surplus

Answer 2

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.
- it is the extra earning obtained by a producer above the minimum required for them to supply the g/s/
- For example, if a producer is willing to sell a laptop for £450 and the price is £595, their producer surplus is £145

Question 3

how does elasticity link to both surplus?

Answer 3

Perfectly elastic demand will mean that there is no consumer surplus, whilst perfectly inelastic demand will mean that consumer surplus is infinite. The more inelastic demand, the higher consumer surplus is likely to be. When supply is perfectly elastic, producer surplus is and when it is perfectly inelastic, producer surplus is infinite. The more inelastic supply, the higher producer surplus is likely to be.