Consumer and Producer surplus

Question 1

Describe and explain consumer surplus

Answer 1

Consumer surplus – the difference between what a person would be willing to pay and what they actually pay to buy a certain quantity of goods. This represents the extra utility that a consumer gains above the price that they pay for it. It is the area below the demand curve and above the price level.

Question 2

Describe the affect of DMU on consumer surplus

Answer 2

Due to DMU consumer surplus declines with extra units consumed because the extra unit generates less utility than the one already consumed and so consumers are willing to pay less for extra units

Question 3

Describe the effect of inelastic demand curves on consumer surplus

Answer 3

Inelastic demand curves give a larger consumer surplus because consumers are willing to pay a much higher price to consume the good

Question 4

Increasing demand does what to consumer surplus

Answer 4

increases

Question 5

Decreasing supply does what to consumer surplus

Answer 5

decreases

Question 6

Define producer surplus

Answer 6

the difference between what a producer is paid for a quantity of a good and the lowest price the producer required in order to supply that quantity. It is the area above the supply curve and below the price level.

Question 7

Increasing demand does what to producer surplus

Answer 7

increases

Question 8

Increasing supply does what to producer surplus

Answer 8

increases

Question 9

Consumer surplus + producer surplus =

Answer 9

total surplus = economic welfare