1.2.8 Consumer and producer surplus

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7 Terms

1
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CONSUMER SURPLUS

  • the difference between the price the consumer is willing to pay and the price they actually pay, set by the price mechanism

  • This is illustrated by the orange triangle in the diagram, ABP1

  • The demand curve shows the price consumers are willing to pay, and so the difference between the demand curve and the price shows the consumer surplus

<ul><li><p>the difference between the price the consumer is <mark data-color="red" style="background-color: red; color: inherit">willing to pay</mark> and the price they<mark data-color="red" style="background-color: red; color: inherit"> actually pay,</mark> set by the <mark data-color="red" style="background-color: red; color: inherit">price mechanism</mark></p></li></ul><p></p><ul><li><p>This is illustrated by the <mark data-color="red" style="background-color: red; color: inherit">orange triangle in the diagram, ABP1</mark></p></li></ul><p></p><ul><li><p>The <mark data-color="red" style="background-color: red; color: inherit">demand curve</mark> shows the price consumers are willing to pay, and so the difference between the demand curve and the price shows the <mark data-color="red" style="background-color: red; color: inherit">consumer surplus</mark></p></li></ul><p></p>
2
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PRODUCER SURPLUS

  • the difference between the price the supplier is willing to produce their product at and the price they actually produce at, set by the price mechanism

  • This is illustrated by the purple triangle in the diagram, P1B0

  • The supply curve shows the price suppliers are willing to sell the good for, and so the difference between the supply curve and the price shows the producer surplus

<ul><li><p>the difference between the <mark data-color="yellow" style="background-color: yellow; color: inherit">price the supplier is willing to produce</mark> their product at and the price they actually produce at, set by the <mark data-color="yellow" style="background-color: yellow; color: inherit">price mechanism</mark></p></li></ul><p></p><ul><li><p>This is illustrated by the <mark data-color="yellow" style="background-color: yellow; color: inherit">purple triangle</mark> in the diagram, P1B0</p></li></ul><p></p><ul><li><p>The <mark data-color="yellow" style="background-color: yellow; color: inherit">supply curve</mark> shows the price suppliers are willing to sell the good for, and so the difference between the supply curve and the price shows the <mark data-color="yellow" style="background-color: yellow; color: inherit">producer surplus</mark></p></li></ul><p></p>
3
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CONSUMER SURPLUS- SHOW

  • shows the welfare gained by consumers for buying the good

  • The total satisfaction consumers receive from buying the good is the total area under demand curve: ABQ10

  • They spend P1BQ10 to gain this satisfaction

  • Therefore, their net gain is ABP1, the consumer surplus

<ul><li><p>shows the <mark data-color="green">welfare gained by consumers for buying the good</mark></p></li></ul><p></p><ul><li><p>The <mark data-color="green">total satisfaction</mark> consumers receive from buying the good is the total area under demand curve: <mark data-color="green">ABQ10</mark></p></li></ul><p></p><ul><li><p>They spend <mark data-color="green">P1BQ10</mark> to gain this satisfaction</p></li></ul><p></p><ul><li><p>Therefore, their net gain is ABP1, the <mark data-color="green">consumer surplus</mark></p></li></ul><p></p>
4
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PRODUCER SURPLUS- SHOW

  • shows the economic gain for producers by selling the good

5
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PERFECT ELASTIC/INELASTIC DEMAND

  • Perfectly elastic demand will mean that there is no consumer surplus

  • perfectly inelastic demand will mean that consumer surplus is infinite

  • The more inelastic demand= higher consumer surplus is likely to be

  • When supply is perfectly elastic, producer surplus is 0 and when it is perfectly inelastic, producer surplus is infinite

  • The more inelastic supply= higher producer surplus is likely to be

6
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SHIFT IN DEMAND

  • decrease in demand from D1 to D2 will lead to a fall in consumer and producer surplus, as both price and output decrease

  • Consumer surplus falls from ABP1 to CDP2 and producer surplus falls from P1B0 to P2D0

  • increase in demand would increase consumer and producer surplus

<ul><li><p><mark data-color="red">decrease in demand</mark> from D1 to D2 will lead to a <mark data-color="red">fall in consumer and producer surplus</mark>, as both price and output decrease</p></li></ul><p></p><ul><li><p>Consumer surplus falls from ABP1 to CDP2 and producer surplus falls from P1B0 to P2D0</p></li></ul><p></p><ul><li><p><mark data-color="red">increase in demand </mark>would<mark data-color="red"> increase consumer and producer surplus</mark></p></li></ul><p></p>
7
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SHIFT IN SUPPLY

  • decrease in supply from S1 to S2 will lead to a fall in consumer and producer surplus

  • Consumer surplus falls from ABP1 to CDP2 and producer surplus falls from P1B0 and P2D0

  • increase in supply would increase consumer and producer surplus

<p></p><ul><li><p><mark data-color="yellow" style="background-color: yellow; color: inherit">decrease in supply</mark> from S1 to S2 will lead to a <mark data-color="yellow" style="background-color: yellow; color: inherit">fall in consumer and producer surplus</mark></p></li></ul><p></p><ul><li><p>Consumer surplus falls from ABP1 to CDP2 and producer surplus falls from P1B0 and P2D0</p></li></ul><p></p><ul><li><p><mark data-color="yellow" style="background-color: yellow; color: inherit">increase in supply</mark> would i<mark data-color="yellow" style="background-color: yellow; color: inherit">ncrease consumer and producer surplus</mark></p></li></ul><p></p>

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