Topic 2: Consumer and Producer Surplus Flashcards
1
Q
define willingness to pay
A
the maximum amount a buyer will pay for a good
2
Q
what is consumer surplus (equation + on graph)
A
- maximum price a consumer is willing to pay, minus, the amount actually payed
o It is the area below the demand curve and above the price
3
Q
what is producer surplus (equation + on graph)
A
amount received by firm for good, minus, cost of production (including opportunity cost)
o Area below the price and above the supply curve
4
Q
is surplus profit
A
no
5
Q
what is the formula for total economic surplus
A
- TES= Total consumer surplus + total producer surplus
6
Q
what are two characteristics of an efficient market
A
- TES is maximised
2. MB=MC
7
Q
what are the steps in finding total surplus
A
- Plot QD
- X> QD=0
- Y> P=0 - Plot QS
- Y> QS=0 - Equilibrium. price + quantity
- QD= QS (then sub back for other variable) - Consumer surplus ∆
- Producer surplus ∆
- total surplus
