Consumer And Producer Surplus Flashcards
What is consumer surplus
When there is a difference between the price that you pay in the market and the value that you place on the product
What does consumer surplus measure
The welfare that people gain from consuming goods and services
Where on a diagram is consumer surplus indicated
By the area under the demand curve and above the market price
Consumer surplus when the demand for a good or service is perfectly elastic
Consumer surplus is 0 because the price that people pay matches what they are willing to pay
Consumer surplus when demand is perfectly inelastic
Consumer surplus is infinite. Demand does not respond to a price change. Whatever the price, the quantity demanded remains the same.
When is there a greater potential for consumer surplus
When demand is inelastic, there is a greater potential consumer surplus because there are some buyers willing to pay a high price to continue consuming the product.
When does the level of consumer surplus change
As the market price for a good or service changes
Price discrimination and consumer surplus
Producers can take advantage of consumer surplus.
They can identify groups of consumers that are willing/able to pay different prices for the same products. (Turning consumer surplus into producer surplus)
Price discrimination and market power
Monopolies can exploit their position by raising prices in markets where demand is inelastic, extracting consumer surplus from buyers and increase profit margins at the same time.
What is producer surplus
The difference between the price producers are willing and able to supply a good or service for and the price they actually receive
What is producer surplus a measure of
Producer welfare
