Consumer And Producer Surplus Flashcards
Consumers willingness to pay
Is the max price at which he would buy it
Individual consumer surplus
Net gain to an individual buyer from the purchase.
Willingness to pay - price paid
Total consumer surplus
The sum of all individual consumer surpluses
Total Consumer Surplus on graph
Is equal to an area below the demand curve but above the price
Fall in price —-> ()
Results in gain in consumer surplus
+ Gain to consumers who buy at original price
+ Gain to consumers who buy at lower price
Potential Seller’s Cost
The lowest price seller is willing to sell the good for
Individual Producer Surplus
Net gain to seller from selling the good
Price Received - Seller’s Cost
Total Producer Surplus
Sum of all individual producer surpluses
Total Producer Surplus on the graph
Area above supply curve and below the price
Price of a good rises —-> ()
Producer surplus rises
+ Gains from who would supply at original price
+ Gains from who are supplying on higher price
Total Surplus
Total net gain to customers and producers from trading in market
Consumer Surplus + Producer Surplus
Max possible Total Surplus
Is achieved at Market Equilibrium
~> possible highest gain to society
~> any change from market equilibrium reduces total surplus
Markets are effective because of
• Property Rights - right to dispose items as sellers choose
• Economic Signals - information that helps to make better economic decisions
Inefficient Market
Market if there are missed opportunities
Market Failure
Occurs under certain conditions and market produces an inefficient outcome
