Consumer/producer surplus

• What is consumer surplus?

  Difference between willingness to pay and actual price
• Why do consumers often pay more than the market price?

  They derive extra satisfaction or utility
• What does the area under the demand curve and above the equilibrium price represent?

  Consumer surplus
• How is consumer surplus represented graphically?

  • Triangular area between demand curve and price level
  • Up to the quantity sold
• What does the demand curve represent?

  Consumers' willingness to pay at different prices
• What is the formula for consumer surplus using a linear demand curve?

  Consumer Surplus = $\frac{1}{2} \times base \times height$
• What is producer surplus?

  Difference between received price and minimum acceptable price
• Why do producers gain additional benefit from market price?


  They are willing to supply at a lower price
• What does the area above the supply curve and below the equilibrium price represent?

  Producer surplus
• How is producer surplus represented graphically?

  • Triangular area between supply curve and price level
  • Up to the quantity sold
• What is the formula for producer surplus?

  Producer Surplus = $\frac{1}{2} \times base \times height$
• What is total surplus?

  Sum of consumer surplus and producer surplus
• What does total surplus represent?

  Total economic welfare from production and consumption
• What happens to market surplus at equilibrium?

  It is maximized, reflecting allocative efficiency
• What occurs if demand increases?

  Both consumer and producer surplus can increase
• What happens when demand decreases?

  Both consumer and producer surplus reduce
• What effect does an increase in supply have?

  Increases consumer surplus, mixed effects on producer surplus
• What is a price ceiling?

  Maximum price set below equilibrium price
• What is the effect of a price ceiling on producer surplus?

  Reduces producer surplus and can cause deadweight loss
• What is the effect of a price floor on consumer surplus?

  Reduces consumer surplus and may cause deadweight loss
• What is a price floor?

  Minimum price set above equilibrium price
• Increase in Supply


  
  
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  An increase in supply means that more producers are willing and able to produce and sell a product or service at a given price level.
• Producer Surplus


  
  
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  The difference between the maximum amount a consumer is willing to pay for a product and the actual price they pay.
• Consumer Surplus