1.2.8 - Consumer and Producer surplus

Question 1

What is Consumer surplus?

Answer 1

Consumer surplus is the difference between what a consumer is willing to pay for a product and what they actually pay.

Question 2

What is a Producer surplus?

Answer 2

A producer surplus is the difference between what producers are willing and able to supply a good for and the price they actually receive.

Question 3

How is producer surplus and consumer surplus represented on a diagram?

Answer 3

Producer and Consumer surplus show economic gain from buying and selling of the good. Consumer surplus shows the welfare gained by the consumers represented by area under the D curve.

Question 4

How do shifts in demand curves affect the consumer and producer surplus diagrams?

Answer 4

A decrease in demand from D1 to D2 will lead to a fall in consumer and producer surplus, both price and output decrease. Consumer surplus falls from ABP1 to CDP2. Producer surplus falls from P1B0 to P2DO. An increase in demand would have the opposite effect and increase consumer and producer surplus.

Question 5

How do shifts in supply curves affect the consumer and producer surplus diagrams?

Answer 5

A decrease in supply from S1 to S2 will lead to a fall in consumer and producer surplus. Consumer surplus falls from ABP1 to CDP2. Producer surplus falls from P1B0 and P2DO. An increase in supply would have the opposite effect and increase consumer and producer surplus.