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 and supply curves affect the consumer and producer surplus diagrams?

Answer 4

Decrease in demand shift to the left will lead to a fall in consumer and producer surplus as both price and output will decrease. Increase in demand has the opposite effect increasing consumer and producers surplus. The same applies for supply curve shifts as well.