5.12

• consumer surplus definition

  Measure of the economic welfare enjoyed by consumers: surplus utility received over and above the price paid for a good
• what is consumer surplus ?

  the difference between what a consumer is willing to pay and what they actually pay
• where is consumer surplus on a diagram?

  the area between the demand curve and price line, above the market price (visualise its a triangle under demand, above price)
• producer surplus definition

  a measure of economic welfare enjoyed by firms or producers: difference between the price a firm succeeds in charging and the minimum price it would be prepared to accept
• what is producer surplus?

  the difference between the price a producer receives and the minimum they would accept
• where is producer surplus on a diagram?

  area between the supply curve and the price line, below the market price (triangle under the price, above supply)
• what is total economic welfare?

  the sum of consumer surplus and producer surplus - it shows the total benefit to society from a market
• what happens to consumer and producer surplus if price increases?

  • Consumer surplus decreases
  • producer surplus increases (if they get more revenue)
• what happens to consumer and producer surplus if price falls?

  • consumer surplus increases
  • producer surplus may decrease (lower earnings)
• what happens to consumer and producer surplus at equilibrium ?

  • consumer surplus and producer surplus is maximised
  • allocative efficiency occurs
• what causes a loss in consumer/producer surplus?

  • taxes, price controls (minimum or maximum prices) or monopolies can reduce surplus and cause deadweight loss
• what is deadweight loss (welfare loss)?

  the lost total surplus when the market us not at the efficient (P=MC) output - a sign of market failure
• How does price discrimination affect consumer surplus?

  • reduces consumer surplus
  • Firms capture it as extra profit (producer surplus)
  • In perfect price discrimination, consumer surplus is zero
  • consumers pay closer to what they’re willing to pay - so they don’t feel like they’re getting a bargain