Consumer & Producer Surplus

Question 2

Definition of Consumer Surplus

Answer 2

• The difference between what the consumer pays and what he would have been willing to pay.
• For example: If you would be willing to pay £50 for a ticket to see the F. A. Cup final, but you can buy a ticket for £40. In this case, your consumer surplus is £10.

Question 3

Definition of Producer Surplus

Answer 3

• The difference between the price a firm receives and the price it would be willing to sell it at.
• If a firm would sell a good at £4, but the market price is £7, the producer surplus is £3.

Question 4

Diagram of Producer & Consumer Surplus

Answer 4

Question 6

What happens to the gap of consumer surplus if the DEMAND is PRICE INELASTIC?

Answer 6

The consumer surplus increases (gap between what consumers are willing to pay and what they have to pay increases)

Question 7

How does FREE TRADE affect consumer & producer surplus?

Answer 7

• Free Trade leads to a reduction in tariffs
• Leads to a lower price for consumers and an increase in consumer surplus.