LS13 - Consumer and Producer Surplus & LS14 - DMU

Question 1

Consumer Surplus

Answer 1

Extra amount of money consumers are prepared to pay for a good/service above what they actually pay - utility/satisfaction gained from a good/service in excess of the amount paid for it
Top triangle

Question 2

Producer Surplus

Answer 2

Extra amount of money paid to producers above what they are willing to accept to supply a good/service - extra earning gained by producer above minimum required for them to supply the good or service
Bottom triangle

Question 3

Surplus and Tax Burden and Subsidy Gain

Answer 3

When PED is elastic - burden of tax mostly on producers, most gain of subsidy to producers
When PED is inelastic - burden of tax mostly on consumers, most gain of subsidy to consumers

Question 4

Income effect

Answer 4

Assuming fixed income, income effect means that as price falls, affordability increases, so demand increases

Question 5

Marginal utility

Answer 5

The utility gained from consuming one extra unit of a good/service

Question 6

Diminishing marginal utility

Answer 6

As successive units of a good are consumed, the marginal utility gained from each extra unit will fall