1.2.8 Consumer and Producer Surplus

Question 1

define consumer surplus

Answer 1

it represents the difference between what consumers are willing to pay for a good or service and what they must pay in the market

Question 2

where is consumer surplus shown on a diagram

Answer 2

underneath the demand curve and above the market price

Question 3

what causes a change in consumer surplus

Answer 3

• lower supply costs lead to a fall in market price and a rise in consumer surplus (vice versa)
• an increase in market demand causes consumer surplus to rise (vice versa)

Question 4

what is producer surplus

Answer 4

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

Question 5

where is producer surplus shown on a diagram

Answer 5

the area above the supply curve and below the market price

Question 6

what causes a change in producer surplus

Answer 6

• inward shift in demand increases producer surplus (vice versa)
• outward shift in demand increases producer surplus (vice versa)

Question 7

what affects consumer surplus

Answer 7

consumer surplus will be greater if
- if PED is inelastic (as consumers are prepared to pay a high price to continue consuming the product)
- demand increases and shifts to the right (showing consumers are prepared to pay a higher price for a product)

Question 8

what affects producer surplus

Answer 8

producer surplus will be greater if
- PES is inelastic (as some producers are prepared to supply at a low price)
- supply increases and shifts right (showing producers are prepared to supply at a lower price)

Question 9

why is consumer surplus important

Answer 9

• increased consumer welfare
• improved market competitiveness
• improvement in social welfare

Question 10

explain consumer welfare

Answer 10

higher consumer surplus means consumers are getting more value for money, improving overall welfare and satisfaction

Question 11

explain improved market competitiveness

Answer 11

when consumer surplus is increased, it often signals a competitive market where firms lower prices and improve product quality to attract more consumers. competitive markets tend to benefit consumers, boosting satisfaction.

Question 12

explain improvement in social welfare

Answer 12

as consumer surplus increases, it can be seen as a reflection of an improvement in social welfare and better living standards

Question 13

why is producer surplus important

Answer 13

• encouraging investment and innovation
• job creation
• increased tax revenue

Question 14

explain encouraging investment and innovation

Answer 14

when producers earn higher surplus, they are more likely to reinvest in their business, which can lead to innovation, improved production processes and better quality

Question 15

explain job creation

Answer 15

if producers have greater surplus and higher profits, they may hire more workers, contributing to lower unemployment

Question 16

explain increased tax revenue

Answer 16

if producers are more profitable, they pay higher taxes, which can be used by the government to fund public goods and services