1.2.8 Consumer and Producer Surplus Flashcards
What is consumer surplus?
The difference between the price the consumer is willing and able to pay and what they actually pay
An example of a good with a high consumer surplus?
Inelastic good
Why does an inelastic good have a high consumer surplus?
Because the consumers personal benefit of the good is high as it is regarded as a necessity or there are many no other substitutes available
An example of a good with a low consumer surplus?
Elastic good
Why does an elastic good have a low consumer surplus?
Because the consumers personal benefit of the good is low as it is regarded as a luxury or there are many more substitutes available
A shift right in demand is going to do what to consumer surplus?
Increase consumer surplus
Why would a shift right in demand increase consumer surplus?
Because you’ve got the additional consumer surplus from existing customers, plus the additional customers entering the market as they now value the good
What is a producer surplus?
The difference between the price the producer is willing and able to charge and what they actually charge
A shift right in demand would do to producer surplus?
Increase producer surplus
Why would a shift right in demand increase producer surplus?
There is an increase in the producer surplus from existing firms in the market, and there are now firms who are willing to supply the good at P2 due to their private benefit
A shift right in supply does what to consumer surplus?
Increases consumer surplus
Why does a shift right in supply increase consumer surplus?
The price has fallen, but their willingness to pay has stayed the same so existing customers consumer surplus increases. There are additional customers that wouldn’t pay the higher price but will pay the lower price
