Consumer and producer surplus Flashcards
What is consumer surplus?
Consumer surplus represents the difference between what consumers are willing to pay for a good or service and what they actually pay. Graphically, it’s the area between the demand curve and the price level, up to the quantity purchased.
What is producer surplus?
Producer surplus is the difference between the price producers receive for a good or service and the minimum price they are willing to accept. It’s depicted as the area between the supply curve and the price level, up to the quantity sold.
How do consumer and producer surplus relate to economic efficiency?
Economic efficiency occurs when the total surplus (consumer plus producer surplus) is maximized. In a perfectly competitive market, this is achieved at the equilibrium price and quantity, where the supply and demand curves intersect. This ensures no overproduction or underproduction, leading to an optimal allocation of resources and maximum welfare.
What is price discrimination?
Price discrimination involves charging different prices to different consumers for the same good or service. While it can increase producer surplus by capturing more consumer surplus, it may reduce overall economic efficiency, especially if it leads to a reduction in the quantity sold compared to a perfectly competitive market.
What is deadweight loss in the context of a monopoly?
Monopolies often produce less than the socially optimal quantity, setting prices above marginal cost. This results in a deadweight loss, represented by the area between the demand and supply curves that is not realized due to reduced output.
