Consumer Surplus And Producer Surplus (L13)

Question 1

Consumer surplus

Answer 1

Extra amount of money consumers are prepared to pay for a good or service above what they actually pay. It’s the utility or satisfaction gained from a good or service in excess of the amount paid for it.

Question 2

Producer surplus

Answer 2

The extra amount of money paid to producers above what they’re willing to accept to supply to a good or service. It’s the extra earning obtained by a producer above the minimum required for them to supply the good/service.

Question 3

Incidence of indirect tax

Answer 3

Distribution of tax between consumers and producers. Depends on elasticity of both demand and supply.

Question 4

When demand is price elastic

Answer 4

The burden of the tax mainly falls on producers, most of the gains go to producers

Question 5

When demand is price inelastic

Answer 5

The burden of tax falls onto consumers

Question 6

Incidence of subsidy

Answer 6

Refers to how the gains of the subsidy are distributed between consumers and producers. It depends on the elasticity of both demand and supply.

Question 7

When demand is price elastic

Answer 7

Most of the gains go to producers

Question 8

When demand is price inelastic

Answer 8

Most of the gains go to consumers