1.2.8 - consumer and producer surplus

a market only exists…

…when there are both producers and consumers

where on the graph is consumer surplus

below the demand curve

above the price line

explain consumer surplus

consumer surplus occurs when consumers pay less for a good than they would be willing and able to

what does consumer surplus represent

the amount of welfare for consumers

where on the graph is producer surplus

above the supply curve

below the price line

explain producer surplus

occurs when firms receive a higher price for their product than they would have been willing and able to supply at

what does producer surplus represent

the amount of welfare for producers/entrepreneurs

allows investment to be made in the business

in a free market, the welfare to society is…

…the sum of consumer welfare and producer welfare

(total welfare = consumer surplus + producer surplus)

what can bring about changes in levels of consumer/producer surplus

changes in the conditions (determinants) of supply/demand

shift in demand

to the right (increase) = higher price = increase in producer surplus

vice versa

shift in supply

to the right (increase) = lower price = increase in consumer surplus

vice versa