Unit 2.5 - Consumer and producer surplus

• Consumer surplus


  The benefit a consumer gains from consuming a good over and above the price they pay

  
• Producer surplus


  The difference between the minimum price each supplier is willing to receive for the product compared to the equilibrium price (actual price)
• The price mechanism


  1. Consumers express their preferences through the price

  2. Firms will only supply products if it is profitable to do so

  3. Firms will not supply goods or services at prices below their average cost of production
• As consumer demand for a product rises


  Production becomes more profitable, so producers increase output
• As consumer demand for a product falls

  Production becomes less profitable, so producers reduce output
• Demand curve = marginal benefit

  
• Supply curve = marginal cost
• Increase in price


  Increase in producer surplus
• Decrease in price


  Increase in consumer surplus
• Price elasticity of demand

  • When demand is price inelastic, an increase in price will see less of a fall in consumer surplus than if it was price elastic

  
• Price elasticity of supply


  • When supply is price elastic, an increase in price will see a greater increase in producer surplus than if it was price inelastic

  
• CS + PS = Net benefit