Consumer and producer surplus (Pack 8)

• What is producer surplus?

  The difference between the amount producers are willing to sell to what they actually receive.
• What is consumer surplus?

  The difference between what consumers are willing to pay and what they actually pay.
• How does an increase in tax on the product affect producer and consumer surplus?

  • Producer surplus decreases so producers receive a lower price
  • Consumer surplus decreases so consumers pay a higher price
• How does a decrease in income tax affect producer and consumer surplus for a normal good?

  • Producer surplus increases
  • Consumer surplus increases
  • Demand shifts rightward
• What happens to producer and consumer surplus when demand decreases and supply is highly inelastic?

  • Producer surplus decreases
  • Consumer surplus may increase or decrease
  • Price remains relatively stable
• What happens to producer and consumer surplus when supply increases and demand is highly elastic?

  • Producer surplus may decrease
  • Consumer surplus increases significantly
  • Price drops significantly
• What does a diagram showing producer and consumer surplus illustrate?

  • Producer surplus is right above the supply curve and below the price
  • Consumer surplus is right below the demand curve and above the price