Consumer and Producer Surplus, Price Controls, Elasticity

Consumer Surplus

The difference between what consumers are willing to pay for a good or service and what they actually pay.

Producer Surplus

The difference between what producers are willing to accept for a good or service and the price they actually receive.

Identify consumer surplus in the demand/supply model

Consumer surplus can be identified as the area above the equilibrium price and below the demand curve.

Identify producer surplus in the demand/supply model

Producer surplus can be identified as the area below the equilibrium price and above the supply curve.

Calculate consumer surplus

Given information on the maximum willingness to pay, the equilibrium price and the equilibrium quantity, consumer surplus can be calculated.

Calculate producer surplus

Given information on the minimum price sellers must receive to supply a product, the equilibrium price and the equilibrium quantity, producer surplus can be calculated.

What do consumer and producer surplus represent?

Consumer and producer surplus represent the benefits to consumers and producers from participating in the market.

Price Ceiling

A government-imposed limit on how high a price can be charged for a product, implemented to benefit consumers.

Price Floor

A government-imposed minimum price for a product, implemented to benefit producers.

Impact of a price ceiling

A price ceiling can create a permanent shortage and deadweight loss in the market.

Other effects of a price ceiling

Besides creating a permanent shortage and a deadweight loss, other effects may include reduced quality of goods and black markets.

Impact of a price floor

A price floor can create a permanent surplus and deadweight loss in the market.

Other effects of a price floor

Besides creating a permanent surplus and a deadweight loss, other effects may include reduced demand and wasted resources.

Deadweight Loss Triangle

The deadweight loss triangle measures the loss of economic efficiency when the equilibrium outcome is not achievable or not achieved.

Binding Price Floor or Ceiling

A price floor or price ceiling is binding if it is set above or below the equilibrium price, respectively.

Compare public policy options

Using consumer/producer surplus and efficient allocation of resources, compare two public policy options to identify the better policy.

Price Elasticity of Demand

A measure of how much the quantity demanded of a good responds to a change in the price of that good.

Calculate Price Elasticity of Demand

Given information on prices and quantities, the price elasticity of demand can be calculated and interpreted.

Categorize Demand

Given a numeric value for price elasticity of demand, demand can be categorized as elastic, inelastic, or unit elastic.

Impact of Price Change on Total Revenue

Given information on price elasticity of demand, predict the impact of a change in price on total revenue.

Factors Influencing Price Elasticity of Demand

Factors include availability of substitutes, necessity vs luxury, and time period considered.

Relationship between Price Elasticity of Demand and Demand Curve

The price elasticity of demand is related to the slope of the demand curve; flatter curves indicate more elastic demand.

Price Elasticity of Supply

A measure of how much the quantity supplied of a good responds to a change in the price of that good.

Calculate Price Elasticity of Supply

Given information on prices and quantities, the price elasticity of supply can be calculated and interpreted.

Categorize Supply

Given price elasticity of supply, supply can be categorized as elastic, inelastic, or unit elastic.

Factors Influencing Price Elasticity of Supply

Factors include production flexibility, time period, and availability of inputs.

Relationship between Price Elasticity of Supply and Supply Curve

The price elasticity of supply is related to the slope of the supply curve; flatter curves indicate more elastic supply.