Producer And Consumer Surplus

Question 1

What is consumer surplus?

Answer 1

Consumer surplus is the difference between the amount the consumer is willing to pay for a product and the price they have actually paid
For example, if a consumer is willing to pay £18 to watch a movie and the price is £15, their consumer surplus is £3

Question 2

What is producer surplus?

Answer 2

Producer surplus is the difference between the amount that the producer is willing to sell a product for and the price they actually do
For example, if a producer is willing to sell a laptop for £450 and the price is £595, their producer surplus is £145

Question 3

Describe a market diagram, illustrating, consumer and producer surplus

Answer 3

The area between the equilibrium price and the demand curve represents the consumer surplus in the market (ABPe)
The consumer surplus lies underneath the demand curve
The area between the equilibrium price and the supply curve represents the producer surplus in the market (CBPe)
Producer surplus lies above the supply curve
When the market is at equilibrium the producer and consumer surplus are maximised
Consumer surplus + producer surplus = social/community surplus
Any disequilibrium reduces the social surplus

Question 4

How does an increase in supply change consumer and producer surplus

Answer 4

Prior to the change in the condition of supply
Consumer surplus was equivalent to ACE and producer surplus was equivalent to ACF
Social surplus was equivalent to ECF
After the change, supply increased S1→S2
Consumer surplus was equivalent to BED and producer surplus was equivalent to BDG
Social surplus was equivalent to DEG
Both the consumer surplus and producer surplus have increased as a result of the increased supply in the market

Question 5

How does an increase in demand, affect producer and consumer surplus

Answer 5

Prior to the change in the condition of demand
Producer surplus was equivalent to ACE and consumer surplus was equivalent to ACF
Social surplus was equivalent to ECF
After the change, demand increased D1→D2
Producer surplus was equivalent to BED and consumer surplus was equivalent to BDG
Social surplus was equivalent to DEG
Both the producer surplus and consumer surplus have increased as a result of the increased demand in the market