Consumer and Producer Surplus

Consumer and Producer Surplus content slideshow. Designed for the Economic A level qualification. Can be used in revision and in class.

Subtopics:
Consumer Surplus
Producer Surplus
Consumer & Producer Surplus in one diagram

1. Consumer & Producer Surplus Lower 6 th Micro How Markets Work

2. Consumer Surplus Consumer & Producer Surplus Mr O’Grady

3. Consumer Surplus Definition: Consumer surplus is a measure of the welfare that people gain from consuming goods and services It is the difference between the total amount that consumers are willing and able to pay for a good or service (shown by the demand curve) and the total amount they actually pay (i.e. the market price). CS = WTP – P Showing CS: Consumer surplus is indicated by the area under the demand curve and above the market price. v D Quantity Price P Q CS

4. v Changes in Market Prices: The level of consumer surplus changes as the market price for a good or service changes – here are two examples: E.g. 1: Higher supply costs leads to a rise in market price and a fall in consumer surplus E.g. 2: An increase in market demand causes consumer surplus to increase D S1 S0 Quantity Price P1 Q1 P0 Q0 CS D0 D1 S0 Quantity Price P0 Q0 P1 Q1 CS

5. Producer Surplus Consumer & Producer Surplus Mr O’Grady

6. Producer Surplus Definition: Producer surplus is a measure of producer welfare that people gain from the sale of a good It is the difference between the total amount the producers actually receive (i.e. the market price) and total amount that they would have been willing and able to sell a good or service for (shown by the supply curve) PS = P - WTS Showing PS: Producer surplus is indicated by the area above the supply curve and below the market price. v S Quantity Price P Q PS

7. v Changes in Market Prices: The level of producer surplus changes as the market price for a good or service changes – here are two examples: E.g. 1: Higher supply costs leads to a rise in market price and a fall in producer surplus E.g. 2: An increase in market demand causes producer surplus to increase D S1 S0 Quantity Price P1 Q1 P0 Q0 v D0 D1 S0 Quantity Price P0 Q0 P1 Q1 PS PS PS

8. Consumer & Producer Surplus in one diagram Consumer & Producer Surplus Mr O’Grady

9. CS at Equilibrium: the area shown by EXY PS at Equilibrium: the area shown by EXZ Relevance of CS & PS: Consumer and producer surplus are important concepts to use when discussing the effects of changes in market conditions on society’s welfare. Changes of market supply and demand will bring about changes in sum total of consumer and producer surplus (economic welfare) For a given supply and demand, total welfare (CS +PS) is maximized at equilibrium Price Quantity D S X Z Y E W O PS CS Consumer & Producer Surplus in one diagram

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