Consumer Surplus and Producer Surplus Flashcards
What is consumer surplus?
Consumer surplus is the extra amount of money consumers are prepared to pay for a good or service above what they actually pay. It is the utility or satisfaction gained from a good or service in the excess of the amount paid for it
What is producer surplus?
The extra amount of money paid to producers above what they are willing to accept to supply a good or service. It is extra earning obtained by a producer above the minimum required for them to supply the good or service
Where is consumer/producer surplus found on the supply-demand graph?
Consumer surplus is found above the market equilibrium price
Producer surplus is found below the market equilibrium price
At what price do producers like to sell products?
If producers manage to sell products over the minimum level of the producer surplus, they benefit from the extra revenue
What shifts in supply and demand cause increases in consumer and producer surplus?
Right shift in demand
Right shift in supply
What is the incidence of an indirect tax?
The incidence of an indirect tax refers to the distribution of the tax between consumers and producers.
What does the incidence of an indirect tax depend on?
It depends on the elasticity of both demand and supply
What is the relationship between elasticity of demand and the incidence of indirect tax?
When demand is price elastic, the burden of tax will fall mostly on producers
When demand is price inelastic, the burden of tax will fall mostly on consumers
What is the incidence of a subsidy?
The incidence of a subsidy refers to how the gains of the subsidy are distributed between consumers and producers.
What does the incidence of a subsidy depend on?
It depends on the elasticity of both demand and supply
What is the relationship between elasticity of demand and the incidence of a subsidy?
When demand is price elastic, most of the gains goes to producers
When demand is price inelastic, most of the gain goes to consumers
What is the income effect?
The income effect means that as price falls, the amount that consumers can afford increases, and so demand increases
This assumes a fixed level of income
What is marginal utility?
The utility or satisfaction obtained from consuming one extra unit of a good or service
What is the diminishing marginal utility?
As successive units of a good are consumed, the marginal utility gained from each extra unit will fall
