Consumer and Producer Surplus

Question 1

Define and explain Producer Surplus

Answer 1

Producer Surplus:
The difference between what the price the producer is willing to charge and what they actually charge.

The private benefit gained by the producer that covers their costs and is measured by profit.

Question 2

Evaluate the extent of changes on Consumer and Producer surplus due to changes in price, considering PeD.

Answer 2

Consumer Surplus change due to change in price considering PeD

Inelastic PeD allows for a change in price to make a greater impact on consumer surplus as consumers are willing to pay a lot more for it. Whereas elastic demand makes a lesser impact due to consumers not being as willing to pay for it.

Question 3

Define and Explain Consumer Surplus

Answer 3

Consumer Surplus:
The difference between what the consumer is willing to pay and what they will actually pay.

It is based upon what the consumer defines as their private benefit from consuming the good.

Question 4

Explain the effect of changes in price on Consumer Surplus

Answer 4

Changes in price can lead to both an increase and decrease of consumer surplus.

Question 5

Explain the effect of changes in price on Producer Surplus

Answer 5

A change in price can cause an increase/decrease in producer surplus.