Consumer producer surplus

Consumer & Producer Surplus

1. Consumer)and)Producer)Surplus)
EdExcel'Economics'1.2.8'

2. What)is)Consumer)Surplus?)
• Consumer)surplus)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'do'pay'
(i.e.'the'market'price).''
• Consumer'surplus'is'indicated'
by'the'area'under)the)
demand)curve)and)above)the)
market)price.)
Consumer'surplus'is'a'measure'of'the'welfare'that'people'gain'from'
consuming'goods'and'services'
Price'
QuanDty'
A'
Q1'
Demand'
Consumer'
surplus''
='area'ABC'
B'
C'

3. Consumer)Surplus)and)Changes)in)Market)Prices)
The'level'of'consumer'surplus'changes'as'the'market'price'for'a'
good'or'service'changes'–'here'are'two'examples:'
Price'
QuanDty'
A'
Q1'
Demand'
Higher'supply'costs'leads'to'a'
rise'in'market'price'and'a'fall'
in'consumer'surplus'from'
ABC'to'DBE'
B'
C'
Price'
QuanDty'
A'
Q1'
Demand'
B'
C'
S1'
S2'
Q2'
D'
E'
D2'
S1'
Q2'
G'
H'
I'
An'increase'in'market'
demand'causes'consumer'
surplus'to'rise'from'area'ABC'
to'area'GHI'

4. Consumer)Surplus)and)Price)Elas=city)of)Demand)
When'demand'is'inelasDc,'there'is'a'greater'consumer'surplus'because'there'are'
some'buyers'willing'to'pay'a'very'high'price'to'conDnue'consuming'the'product'
Price'
QuanDty' QuanDty'
A'
A'
B'
C'
Demand'
Supply' Supply'
Demand'
Price'
A'low'Ped'
means'a'high'
level'of'
consumer'
surplus'
ElasDc'demand'
means'
relaDvely'low'
consumer'
surplus'(ABC)'

5. What)is)Producer)Surplus?)
• Producer'surplus'is'the'
difference'between'the'price'
producers'are'willing'and'able'
to'supply'a'good'or'service'for'
and'the'price'they'actually'
receive.'
• Producer'surplus'is'shown'by'
area'above'the'supply'curve'and'
below'the'current'market'price.'
• Higher'prices'provide'an'
incenDve'to'supply'more'to'the'
market.'This'is'due'to'the'profit'
moDve.'
Producer'surplus'is'the'difference)between)two)price)levels)
Price'
QuanDty'
A'
Q1'
Supply'
B' C'
Producer'
surplus'='area'
ABC'

6. Producer)Surplus)and)Changes)in)Market)Prices)
The'level'of'producer'surplus'changes'as'the'market'price'for'a'
good'or'service'changes'–'here'are'two'examples'
Price'
QuanDty'Q2'
D1'
Lower'supply'costs'cause'the'
market'price'to'fall'and'the'
equilibrium'quanDty'to'rise.'
Producer'surplus'increases'from'
area'ADB'to'area'FEC''
B'
Price'
QuanDty'Q1'
D1'
Q1'
S1'
Q2'
An'increase'in'market'demand'
leads'to'a'higher'price'&'quanDty'
leading'a'rise'in'producer'surplus'
from'area'ABC'to'DEC'
D2'
S1'
S2'
A'
C'
D'
E'
F'
A'
B'
C'
D'
E'

7. Consumer)and)Producer)Surplus)in)one)diagram)
At'the'equilibrium,'consumer'surplus'is'RSP,'producer'surplus'is'QRS'
Price'
QuanDty'
Demand'
Supply'
P'
Q'
R'
S'
T'
O'
Producer'
surplus'
Consumer'
surplus'
Consumer'and'producer'
surplus'are'important'
concepts'to'use'when'
discussing'the'effects'of'
different'government'
intervenDons'in'markets'
such'as'taxes'&'subsidies''
Changes'in'condiDons'of'
market'supply'and'
demand'will'bring'about'
changes'in'the'level'of'
consumer'and'producer'
surplus'(economic'
welfare)'

8. Consumer)and)Producer)Surplus)
EdExcel'Economics'1.2.8'