Surplus

Question 1

What is consumer surplus?

Answer 1

Consumer surplus is the difference between the total amount that consumers are willing to pay for a good/service and the amount that they actually do pay (The market price)

Consumer surplus is indicated by the area under the demand curve and above the market price (The top)

Question 2

What is producer surplus?

Answer 2

The different between what producers are willing to supply a good for and what price they actually receive

Producer surplus is shown by the area above the curve and below the market price (The bottom)

Question 3

What ‘Joins’ consumer and producer surplus?

Answer 3

The free market equilibrium is where consumer and producer surplus are jointly maximised. (Where price is determined by supply and demand)

Question 4

How do you calculate consumer surplus?

Answer 4

Work out the area of consumer surplus (Area of the triangle)

Question 5

How do you calculate producer surplus?

Answer 5

Calculate the area of the lower PS triangle

Question 6

What may a decrease in supply do to producer and consumer surplus?

Answer 6

When supply decreases (Supply line shifts inwards), price increases, decreasing both PS and CS

Question 7

What may a decrease in demand do to producer and consumer surplus?

Answer 7

A shift to the left in the demand line will decrease price which will decrease supply which = a smaller market equilibrium, reducing both surpluses

Question 8

What may an increase in demand do to producer and consumer surplus?

Answer 8

The demand line shifting outwards increases price and also increases the size of the market, increasing both surpluses (Draw a diagram if in doubt)

Question 9

What may an increase in supply do to the producer and consumer surplus?

Answer 9

An outwards shift in the supply line will increase both surpluses.