T1: LS13 - Consumer And Producer Surplus

Question 1

Consumer surplus definition

Answer 1

• Consumer surplus: refers to the difference between what consumers actually pay for a G&S at market equilibrium price compared to what they are actually willing to pay for the G&S.
• this refers to the utility gained from the G&S from the excess they are willing to pay but don’t pay.

Question 2

Producer surplus definition

Answer 2

• the difference between the price producers actually sell a G&S at compared to the price they are willing to sell a G&S at (cost of production per unit)
• the extra earning and revenue gained by a producer above the minimum price required for them to supply G&S.

Question 3

On a graph what is consumer surplus and producer surplus?

Answer 3

Consumer surplus —> triangular area of equilibrium price up to demand line
Producer surplus —> triangular area of the equilibrium price down to the supply line

Question 4

What impacts consumer and producer surplus?

Answer 4

• Shifts in supply and demand
• taxes
• subsidies
• incidence of tax
• price elasticity of supply and demand

Question 5

Incidence of tax meaning

Answer 5

Incidence of an indirect tax: refers to the distribution of the cost/ tax between consumers and producers.
- Impacted by price elasticity of demand
- **PED elastic ** = incidence on producer
- PED inelastic = incidence on consumers

Question 6

Incidence/ distribution of a subsidy definition

Answer 6

Incidence of a subsidy: refers to how the gains/ benefits of subsidies are distributed between consumers and producers. Depends on elasticity of demand
- PED elastic —> demand changes by more than price —> decreases prices from subsidy increases sales of supply —> more revenue/ benefit for producers
- PED elastic —> change price by small amount —> demand changes by more —> less reductions in cost needed for demand changes by so more savings are withheld by producers.
- PED inelastic —> price changes by more —> more savings for consumers —> benefit for consumers