Micro - Consumer & producer surplus ✔️ Flashcards
What is a consumer surplus.
The difference between what the consumers are willing and able to pay for a good/service and what they’re actually paying for the good/service
What is a producer surplus.
Producer surplus is the difference between what the producers are willing and able to sell a good/service for and what they’re actually paying for the good/service.
Where is the consumer surplus located?
Consumer surplus is the triangle above the equilibrium point shaded in black. This represents the number of consumers that were willing and able to pay more than the equilibrium price (P). As price increases the consumer surplus area decreases as fewer consumers are willing and able to pay a higher price. This is why the consumer surplus area starts to narrow as price increases.
Where is the producer surplus located
Producer surplus is the triangle below the equilibrium shaded in blue. This represents the number of producers that were willing and able to supply the good/service for less than the equilibrium price (P). As price decreases the producer surplus area decreases as fewer producers are willing and able to supply the good/service at the lower price. As the price decreases it will only be the more efficient producers that will be able to continue supplying the good/service at a profit or breakeven point.
How does a decrease in supply affect consumer surplus
When supply decreases there is a decrease in consumer surplus. This is due to the fact that a decrease in supply puts upwards pressure on the price of goods/services in the market causing them to rise from p to p1. In addition to this, the quantity of goods/services into the market decreases from Q to Q1. As a result of this, the number of consumers that are willing and able to pay a higher price than the market price decreases (DBP to DAP1)
How does a increase in supply affect consumer surplus
An increase in supply causes a decrease in the price of goods/service in the market (P to P1) as well as an increase in quantity (Q to Q1). As a result of the decrease in price, the number of people that are willing and able to pay a lower price than the market price (which is now P1) increases (DAP to DBP1).
How does a decrease in demand affect producer surplus
A decrease in the demand for a good/service will result in a decrease in price (P to P1) as well as a reduction in the quantity of the good/service in the market (Q to Q1). As a result of this, producer surplus will decrease. This is because the lower price means that fewer firms will be able to carry on supplying the good/service at the same quantity or at all due to their inefficiencies. Therefore the number of producers that are willing and able to supply the good/service at a lower price than the market price decreases
How does a increase in demand affect a producer surplus
An increase in demand puts upwards pressure on the price of the good/service in a market. As a result of this, price increases from P to P1 as well as an increase in quantity from Q to Q1.
