Consumer and Producer Surplus

Question 1

Consumer and Producer Surpluses are above and below Equilibrium Price

Answer 1

1. Consumer Surplus
   - Everyone has different tastes, incomes and views on how much they’re prepared to pay for a good or service.
2. When a consumer pays less for a good than the amount they’re prepared to pay for it, this amount of money is known as the consumer surplus. E.g. if someone was prepared to pay £10 for a good and brought it for £8 then there would be a consumer surplus of £2.
   - Consumer surplus is the difference between the price that a consumer is willing to pay for a good or service and the price that they actually pay.
3. Producer Surplus
   - Different producers have different costs when making goods/services
   - If a producer recieves more for a product or service than the price they’re willing to accept, the extra earnings are known as the producer surplus. E.g. if the equilibrium price of a good is £15 but a supplier would be happy to sell for £10 then the producer surplus would be £5
   - So, the producer surplus is the difference between price that a producer is willing to supply a good or service at and the price that they actually recieve for it.

Question 2

The consumer and producer surplus can be shown on a diagram: LOOK AT DIAGRAM ON PAGE 29

Answer 2

• Consumer surplus = the area below the demand curve and above the equilibrium price line
• Producer surplus = area above the supply curve and below the equilibrium price line.

Question 3

Changes in Supply and Demand affect Consumer and Producer Surplus

Answer 3

1. Anything that causes a shift in the supply or demand curve can => a change in the price of a good.
2. A change in price will bring a good closer to or further away from the amount the buyer was willing to pay or the supplier was willing to sell for - and this will change the consumer and producer surpluses.
   LOOK AT DIAGRAMS PG 29