Consumer and Producer Surplus

Question 1

Consumer Surplus

Answer 1

Difference between market price and what consumers would be willing to pay.

Represents benefit consumers receive when they pay less for something than what they were willing to pay.

Question 2

Producer Surplus

Answer 2

Difference between market price and price at which producers are willing to sell.

Represents benefit producers receive when selling a product at a higher price than they would have originally sold it for.

Question 3

Total Surplus

Answer 3

Sum of consumer and producer surplus, measures total benefit to society from production and consumption of a good or service.

Question 4

Calculate Consumer Surplus

Answer 4

Area beneath demand curve and above price line.

Calculate with formula of area of a triangle B*H/2

Question 5

Calculate Producer Surplus

Answer 5

Area above the supply curve but below the price line.

Calculate with formula of area of a triangle B*H/2

Question 6

Market Efficiency

Answer 6

Market efficient when total surplus is maximized.

Occurs at market equilibrium, supply = demand.

Question 7

Impact of Price Changes on Consumer Surplus

Answer 7

Fall in price increases consumer surplus (vice versa)

Brings new buyers into market, further increasing quantity of consumers and, thus, consumer surplus

Question 8

Impact of Price Changes on Producer Surplus

Answer 8

Increase in prices increases producer surplus (vice versa)

Brings new sellers into the market

Question 9

Efficiency vs. Equity in Markets

Answer 9

Efficiency: maximizing total surplus

Equity: fair distribution of resources

Markets tend to priortize efficiency, government is responsible for equity