4.1.5.11 - Consumer and Producer Surplus Flashcards
What is consumer surplus?
A measure of the economic welfare enjoyed by consumers. The utility received over the price paid for a good.
What is producer surplus?
A measure of the economic welfare enjoyed by firms. The difference between the price a firm charges to the minimum price they would be willing to accept.
What happens to consumer surplus when consumer welfare increases?
Consumer surplus increases.
What is the marginal cost curve in monopolies equal to in perfect competition?
The market supply curve.
What is deadweight loss?
The loss of economic welfare when the maximum attainable level of total welfare fails to be achieved.
What does the monopoly gain in increasing the price from P1 to P2?
They take some consumer surplus and convert it to producer surplus.
What else happens to total welfare outside of transfers?
The total welfare is reduced, demonstrated on the graph by the area ABC.
Why is there a net loss of welfare?
The amount bought and sold falls to Q2.
What is the deadweight loss evidence of?
Market failure in monopolies.
Who benefits from price discrimination?
Firms. (Usually)
Who suffers from price discrimination?
Consumers. (Usually)
What is the general rule about benefits for producers?
Any producer benefit usually means a disadvantage to consumers.
What does this graph demonstrate?
The reduction in consumer welfare due to price discrimination.
Why does the Marginal Cost Curve slope upwards in the combined market?
Graphically depicts the law of diminishing returns.
What is another name for first degree price discrimination?
‘Perfect’ price discrimination.
What is perfect price discrimination?
Each consumer is charged the maximum price they are prepared to pay. All consumer surplus is converted to producer surplus.
What happens if first degree price discrimination is employed to customers QW and QV?
All consumer surplus is removed, and is all transferred to producer surplus.
Why is price discrimination generally viewed as undesirable?
Price discrimination leads to a loss of consumer surplus or consumer welfare. Firms exploit their producer sovereignty and monopoly power, charging most consumers higher prices than would be charged in the absence of price discrimination. However, some consumers can benefit from price discrimination. Namely the poorest consumers.
Why are the poorest consumers benefactors of price discrimination?
Poor consumers who were unwilling to buy the good at P1 are now willing to purchase the extra output at a lower cost. Most consumers pay a higher price, but the poorest consumers will end up paying less.
What are some situations where price discrimination is absolutely necessary?
In instances where firms cannot make enough profit to stay in business, price discrimination is necessary to be employed to take some consumer surplus and transfer it to the producers. (e.g. a doctor in a rural town)
What happens when perfect competition is transferred to monopoly?
Some of the consumer surplus is transferred to the monopoly.
