1.2.8 - consumer and producer surplus

Question 1

What does consumer surplus measure?

Answer 1

Consumer surplus measures the economic benefit or gain (welfare) that consumers receive when they can buy a product at a price lower than the maximum price they are willing to pay.

Question 2

What does consumer surplus represent?

Answer 2

It represents the difference between what consumers are willing and able to pay for a good and what they must pay in the market.

Question 3

What happens when the price increases in terms of consumer surplus?

Answer 3

An increase in price means that fewer consumers, who are willing to pay more, get a benefit.

Question 4

What happens when the price decreases in terms of consumer surplus?

Answer 4

A decrease in price means that more consumers, who are willing to pay more, get a benefit.

Question 5

What is the relationship between the demand curve and consumer surplus?

Answer 5

The demand curve shows the price consumers are willing to pay. The difference between the demand curve and the market price represents consumer surplus.

Question 6

What does producer surplus measure?

Answer 6

Producer surplus measures the additional profit or benefit (welfare) that producers gain beyond their costs of production.

Question 7

What does producer surplus represent?

Answer 7

It represents the difference between the price producers are willing to supply a product for and the price they receive in the market.

Question 8

What happens when the price increases in terms of producer surplus?

Answer 8

An increase in price means that more suppliers, who are willing to supply more at a certain price, get a benefit.

Question 9

What happens when the price decreases in terms of producer surplus?

Answer 9

A decrease in price means that fewer suppliers, who are willing to supply more at a certain price, get a benefit.

Question 10

What is the relationship between the supply curve and producer surplus?

Answer 10

The supply curve shows the price suppliers are willing to sell the good for. The difference between the supply curve and the market price represents producer surplus.

Question 11

What is the total satisfaction consumers receive from buying a good?

Answer 11

The total satisfaction consumers receive is the total area under the demand curve up to the quantity purchased: ABQ10.

Question 12

What is the total expenditure to gain satisfaction from a purchase?

Answer 12

The total expenditure is P1BQ10, representing the price consumers pay multiplied by the quantity they buy.

Question 13

How is consumer surplus calculated in terms of net gain?

Answer 13

Consumer surplus (net gain) is the difference between the total satisfaction (ABQ10) and the total expenditure (P1BQ10), represented by ABP1. This is the net benefit or extra value consumers gain from purchasing the good at a price lower than their maximum willingness to pay

Question 14

What happens to consumer surplus with inelastic demand?

Answer 14

With more inelastic demand, consumer surplus is likely to be higher, though supply shifts affect consumer surplus more than producer surplus.

Question 15

What happens with perfectly elastic demand in terms of consumer surplus?

Answer 15

Perfectly elastic demand means there is no consumer surplus because consumers are not willing to pay more than the market price (nobody gains welfare from willing/able to pay same price)

Question 16

What happens with perfectly inelastic demand in terms of consumer surplus?

Answer 16

Perfectly inelastic demand means consumer surplus is infinite, as there is no limit to what consumers would pay to obtain the good (willing/able to pay any price)

Question 17

What happens to producer surplus with inelastic supply?

Answer 17

With more inelastic supply, producer surplus is likely to be higher, though shifts in demand affect producer surplus more than consumer surplus (willing/able to supply at any price)

Question 18

What happens with perfectly elastic supply in terms of producer surplus?

Answer 18

Perfectly elastic supply means there is no producer surplus because producers can’t sell the good for more than the price they’re willing to accept (nobody gains profit as willing/able to supply at same price)

Question 19

What happens with perfectly inelastic supply in terms of producer surplus?

Answer 19

Perfectly inelastic supply means producer surplus is infinite, as producers can charge any price for the good and consumers will produce the same quantity (willing/able to supply at any price)

Question 20

What is community surplus?

Answer 20

Community surplus is the total welfare to society, which is the sum of consumer surplus and producer surplus.

Question 21

How does the price mechanism affect community surplus?

Answer 21

The price mechanism efficiently allocates resources, as increasing the welfare of one group decreases the welfare of another, maximizing community welfare.

Question 22

What happens with any other price/output combination in terms of community surplus?

Answer 22

Any other price/output combination will have the same community surplus.