2.4 Consumer and producer surplus Flashcards
The role of markets
On a demand curve, what can ‘P’ be seen as?
The value the last customers places on the good/service. Basically, if the price was even slightly higher than ‘P’, there would be at least one consumer who wouldn’t buy
On a demand curve, what does ‘P’ represent?
The benefit derived from consuming the good/service as it’s the price inducing you to buy. Basically, it’s the benefit she receives from consuming one unit of the good
What does the demand curve show?
The benefit to be derived from consuming the good/service
What is consumer surplus?
The difference between the price a consumer is willing to pay and the price they actually pay for the good/service
What does consumer surplus represent?
The extra satisfaction/benefit a consumer receives from a purchase that exceeds the amount of money they actually paid for it. Basically satisfaction is more than the price payed
Also showing the welfare society gains from consuming the good, over and above the price paid for it
How is consumer surplus shown on a graph?
It’s the triangle between the price payed and the demand curve
What is the relationship between the size of consumer surplus and the price charged for a good/service?
Inverse relationship.
As the price of a good increases, the size of consumer surplus will decrease
How is a gain in consumer surplus shown on a graph if the price falls?
It’s the trapezium between the initial triangle of the old price and demand curve and the area underneath the new price and demand curve
How is the gain and initial consumer surplus shown on a graph?
It’s the initial triangle and the added trapezium together
What does the extent of the impact (gain or loss) of consumer surplus if price changes depend on?
- The extent of the change in price
- The slope of the demand curve; whether it’s more price elastic (more horizontal) or inelastic (more vertical)
What is producer surplus?
The difference between the price a producer is willing and able to accept to supply a good/service and what is actually paid
When will a firm choose to stop supplying goods?
When the cost of producing their final pizza is higher than the price they can sell it for, known as the marginal cost
What is marginal cost?
The cost of producing an additional unit of output
What curve is drawn to show consumer surplus?
A supply curve
What does producer surplus provide for firms?
It provides an incentive for firms to respond to changes in the price, and therefore supply more
