consumer and producer surplus

• how can market efficiency and welfare losses in market structures be considered?

  through consumer and producer surplus
• what is the consumer surplus?

  • Consumer surplus is the difference between the amount the consumer is willing to pay for a product and the price they have actually paid
  • E.g. If a consumer is willing to pay £18 to watch a movie and the price is £15, their consumer surplus is £3
• what is the producer surplus?

  • Producer surplus is the difference between the amount that the producer is willing to sell a product for and the price they actually do
  • E.g. If a producer is willing to sell a laptop for £450 and the price is £595, their producer surplus is £145
• what does this diagram show about the producer and consumer surplus?

  • The area between the equilibrium price and the demand curve represents the consumer surplus in the market (ABPe)
  • The consumer surplus lies underneath the demand curve
  • The area between the equilibrium price and the supply curve represents the producer surplus in the market (CBPe)
  • Producer surplus lies above the supply curve
  • When the market is at equilibrium, producer and consumer surplus are maximised
  • Consumer surplus + producer surplus = social/community surplus
  • Any disequilibrium reduces the social surplus

  
• when is monopoly compared to perfect competition?

  to compare market efficiency
• why do monopolies have lower levels of consumer and producer surplus?

  • Due to the lack of competition, monopolies tend to have higher prices and lower output
  • As a result, they have lower levels of consumer surplus and higher levels of producer surplus
• what does this diagram show about the change in consumer surplus in an economy?

  • The monopolist produces at the profit maximisation level of output Q2, where MC=MR (A) and sells their products at a monopoly price of P2
  • In a more competitive environment, such as a monopolistic market, consumers would pay the lower price P1 where AR=MC (allocative efficiency)
  • The loss of consumer surplus due to the monopoly price is equal to shaded triangle - DBC

  
• what does this diagram show about the change in producer surplus in a monopoly?

  • Producer surplus is maximised at the profit maximisation level of output (Q2)
  • as quantity falls from Q1 to Q2, there is a loss of producer surplus equal to the shaded triangle (DCA)
  • However, at the same time, some of the previous consumer surplus is converted to producer surplus (P1P2BD), resulting in a net gain of producer surplus
  • The welfare loss is equal to the area of the shaded triangle - ADC
  • The cost to society caused by a lack of efficiency in the allocation of resource

  
• how does price discrimination affect consumer surplus in lower priced markets?

  Price discrimination may increase consumer surplus in lower priced markets 
• how does price discrimination affect consumer surplus in higher price markets?

  price discrimination may  decrease consumer surplus in higher price markets 
• what does each train route in the UK have?

  an effective monopoly provider.
• what does this diagram show about consumer surplus in the train peak period?

  • Consumer surplus decreases 
  • There is a reduction in consumer surplus for the peak travel (inelastic) market as consumers pay a higher price
  • The consumer surplus in this market is shaded in yellow

  
• what does the diagram show about consumer surplus in the off peak train period?

  • Consumer surplus increases 
  • There is an increase in consumer surplus for the off peak travel (elastic) market as consumers pay a lower price
  • The consumer surplus in this market is shaded in yellow

  
• what does this diagram show about the overall consumer surplus?

  • Price discrimination causes the overall producer surplus to increase
  • This means that the overall consumer surplus is decreasing
  • Some consumers will benefit and others will lose out, but the end result is that the overall consumer surplus will fall