Consumer and producer surplus

Question 1

Consumer surplus

Answer 1

• It is a measure of the welfare that people gain from consuming and producing goods and services
• The difference between the total amount that consumers are willing to pay for good or service (shown by demand curve) and the total amount they actually do pay (e.g. the market price)
• Consumer surplus is indicated by the area under the demand curve and above the market price

Question 2

Producer surplus

Answer 2

• The difference between the price producers are willing and able to supply a good or service for the price they actually receive
• Producer surplus is shown by an area above the supply curve and below the current market price
• Higher prices provide and incentive to supply more to the market. This is due to profit movement