4.1.5.11 Consumer and producer surplus Flashcards
What is consumer surplus?
The difference between what consumers are willing to pay (based on marginal utility) and what they actually pay.
Diagram: Area above market price & below the demand curve (e.g., triangle P₁XY).
What is producer surplus?
The difference between the price producers are willing to accept (cost of production) and what they actually receive.
Diagram: Area below market price & above the supply curve.
When are consumer and producer surplus maximized?
At the free market equilibrium (where demand = supply).
Total economic welfare (CS + PS) is highest here.
How does demand elasticity affect consumer surplus?
Inelastic demand: Larger CS (consumers willing to pay much higher prices).
Elastic demand: Smaller CS (price changes significantly reduce quantity demanded).
How does consumer surplus change with shifts in demand/supply?
Demand ↑ (→ D₂): CS increases (e.g., from PQR to ABC).
Supply ↓ (→ S₂): CS decreases (price rises, e.g., PQR → ABR).
How does producer surplus change with shifts in supply/demand?
Supply ↑ (→ S₂): PS increases (lower costs → lower price, e.g., ABC → PQS).
Demand ↑ (→ D₂): PS increases (higher price, e.g., PQD → ABD).
How is total economic welfare measured?
CS + PS at a given price/quantity.
Used to evaluate government policies (e.g., taxes/subsidies).
How does price discrimination affect consumer/producer surplus?
Monopolists charge different prices to different groups.
CS decreases (some pay higher prices).
PS increases (firm captures more surplus as profit).
What is deadweight loss in a monopoly?
Lost economic welfare when output is below equilibrium (where MC = MR, not MC = D).
Diagram: Yellow triangle between monopoly output (Qₘ) and competitive output (Qₖ).
Compare CS/PS in monopoly vs. perfect competition.
Monopoly: Higher PS (supernormal profits), lower CS (higher prices), deadweight loss.
Perfect competition: Max CS + PS (no deadweight loss).
Label CS and PS on a supply-demand diagram.
CS: Triangle above price, below demand curve.
PS: Triangle below price, above supply curve.
Why does consumer surplus decline with extra units consumed?
Due to diminishing marginal utility – each additional unit provides less benefit, so consumers pay less.
How can taxes/subsidies affect CS and PS?
Taxes: Reduce both CS and PS (higher price, lower quantity).
Subsidies: Increase both CS and PS (lower price, higher quantity).
Give an example of price discrimination reducing CS.
Train tickets: Peak vs. off-peak pricing – higher prices for commuters (inelastic demand) reduce their CS.
