Consumer & Producer Surplus

1. Consumer
and
Producer
Surplus
EdExcel
Economics
1.2.8

2. What
is
Consumer
Surplus?
• Consumer
surplus
is
the
difference
between
the
total
amount
that
consumers
are
willing
and
able
to
pay
for
a
good
or
service
(shown
by
the
demand
curve)
and
the
total
amount
they
actually
do
pay
(i.e.
the
market
price).
• Consumer
surplus
is
indicated
by
the
area
under
the
demand
curve
and
above
the
market
price.
Consumer
surplus
is
a
measure
of
the
welfare
that
people
gain
from
consuming
goods
and
services
Price
QuanDty
A
Q1
Demand
Consumer
surplus
=
area
ABC
B
C

3. Consumer
Surplus
and
Changes
in
Market
Prices
The
level
of
consumer
surplus
changes
as
the
market
price
for
a
good
or
service
changes
–
here
are
two
examples:
Price
QuanDty
A
Q1
Demand
Higher
supply
costs
leads
to
a
rise
in
market
price
and
a
fall
in
consumer
surplus
from
ABC
to
DBE
B
C
Price
QuanDty
A
Q1
Demand
B
C
S1
S2
Q2
D
E
D2
S1
Q2
G
H
I
An
increase
in
market
demand
causes
consumer
surplus
to
rise
from
area
ABC
to
area
GHI

4. Consumer
Surplus
and
Price
Elas=city
of
Demand
When
demand
is
inelasDc,
there
is
a
greater
consumer
surplus
because
there
are
some
buyers
willing
to
pay
a
very
high
price
to
conDnue
consuming
the
product
Price
QuanDty
QuanDty
A
A
B
C
Demand
Supply
Supply
Demand
Price
A
low
Ped
means
a
high
level
of
consumer
surplus
ElasDc
demand
means
relaDvely
low
consumer
surplus
(ABC)

5. What
is
Producer
Surplus?
• Producer
surplus
is
the
difference
between
the
price
producers
are
willing
and
able
to
supply
a
good
or
service
for
and
the
price
they
actually
receive.
• Producer
surplus
is
shown
by
area
above
the
supply
curve
and
below
the
current
market
price.
• Higher
prices
provide
an
incenDve
to
supply
more
to
the
market.
This
is
due
to
the
profit
moDve.
Producer
surplus
is
the
difference
between
two
price
levels
Price
QuanDty
A
Q1
Supply
B
C
Producer
surplus
=
area
ABC

6. Producer
Surplus
and
Changes
in
Market
Prices
The
level
of
producer
surplus
changes
as
the
market
price
for
a
good
or
service
changes
–
here
are
two
examples
Price
QuanDty
Q2
D1
Lower
supply
costs
cause
the
market
price
to
fall
and
the
equilibrium
quanDty
to
rise.
Producer
surplus
increases
from
area
ADB
to
area
FEC
B
Price
QuanDty
Q1
D1
Q1
S1
Q2
An
increase
in
market
demand
leads
to
a
higher
price
&
quanDty
leading
a
rise
in
producer
surplus
from
area
ABC
to
DEC
D2
S1
S2
A
C
D
E
F
A
B
C
D
E

7. Consumer
and
Producer
Surplus
in
one
diagram
At
the
equilibrium,
consumer
surplus
is
RSP,
producer
surplus
is
QRS
Price
QuanDty
Demand
Supply
P
Q
R
S
T
O
Producer
surplus
Consumer
surplus
Consumer
and
producer
surplus
are
important
concepts
to
use
when
discussing
the
effects
of
different
government
intervenDons
in
markets
such
as
taxes
&
subsidies
Changes
in
condiDons
of
market
supply
and
demand
will
bring
about
changes
in
the
level
of
consumer
and
producer
surplus
(economic
welfare)

8. Consumer
and
Producer
Surplus
EdExcel
Economics
1.2.8