Consumer + producer surplus

Consumer surplus?

The difference between what consumers are willing to pay for a good/service and what they must pay in the market

How do you represent consumer surplus on a diagram?

The area underneath the demand curve and above the market price - shows the value that consumers receive in excess of what they had to pay

Effect of changes in price on consumer surplus?

Higher price: When P of a good increases, consumers now have to pay more than they did before. For consumers who are still willing to buy the good at a higher price, the diff between their willingness to pay + new higher price becomes smaller. This leads to a reduction in consumer surplus

Lower price: When P of a good decreases, consumers pay less that they were originally willing to pay - consumer surplus increases - area on graph gets larger

Effect of changes in demand on consumer surplus?

• Demand shifts right → Price rises → Quantity increases.

• Consumer Surplus: Decreases (higher prices mean consumers pay more).

• Producer Surplus: Increases (higher prices benefit producers).

• Demand shifts left → Price falls → Quantity decreases.

• Consumer Surplus: Increases (lower prices benefit consumers).

• Producer Surplus: Decreases (producers earn less).

Effect of changes in supply on consumer surplus?

• Supply shifts right → Price falls → Quantity increases.

• Consumer Surplus: Increases (lower prices benefit consumers).

• Producer Surplus: May increase or decrease (depends on cost changes and revenue).

• Supply shifts left → Price rises → Quantity decreases.

• Consumer Surplus: Decreases (higher prices hurt consumers).

• Producer Surplus: Increases (higher prices benefit remaining producers).

Producer surplus?

Difference between the price producers are willing + able to supply a product for + the price they receive in the market

How do you represent producer surplus on a diagram?

Area above supply curve + below the market price - assuming firm receives same price for each unit sold

CS + PS= ?

Social surplus