Download 28 Consumer Surplus Ed

28. Consumer Surplus
1. Missing words
The demand curve for a good or service shows the level of demand at each _______________ level. It shows that
different consumers are willing to pay different prices for the good or service, based on the __________________
they associate with the product. The __________________ price is calculated by equating demand with
_______________ . Consumer surplus is defined as the difference between the actual price and the price
consumers are willing to pay for a good or service. It can be seen as a measure of economic welfare. On a diagram,
the area of consumer surplus is the area _____________ the market price and ___________________ the
demand curve. Missing words: market, above, price, supply, utility, below
2. Increase or Decrease?
State whether consumer surplus will increase or decrease for the products in the following scenarios (you may wish
to use diagrams to support your answers)
Product
Scenario
Change in consumer surplus
Blu Ray DVDs
The price of Blu Ray players falls
Breakfast cereals
World price of wheat rises by 50%
Christmas cards
Advances in internet communication allow
people to send more e-cards on-line
Heavy machinery
The price of steel falls considerably on
global markets
3.
Price
S
P1
D
Q1
Quantity (‘000 units)
3.1The diagram shows the demand and supply curves for gloves in the UK during the winter. As the UK moves into
summer, the demand for gloves falls. Show what will happen to the demand curve on the diagram.
3.2 What has happened to the area of consumer surplus? Illustrate both the old and new areas on the diagram.
3.3 Glove manufacturers start to use modern technology that reduces their production costs. Illustrate what effect
this will have on the diagram, and what the resulting change in consumer surplus will be.
4. Analysis Use the concept of price elasticity of demand to explain why consumer surplus is likely to be
greater when demand is price inelastic. You may wish to use diagrams to support your answer.
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28. ANSWERS: Consumer Surplus
1. price…utility…market…supply…above…below
2.
Product
Scenario
Change in consumer surplus
Blu Ray DVDs
The price of Blu Ray players falls
Increase
Breakfast cereals
World price of wheat rises by 50%
Decrease
Christmas cards
Advances in internet communication allow
people to send more e-cards on-line
Decrease
Heavy machinery
The price of steel falls considerably on global
markets
Increase
3.1
3.2 The consumer surplus will fall.
Price
Price
S
Old consumer
surplus
S
new consumer
surplus
P1
P2
D
D1
Quantity (‘000 units)
D
D1
Quantity (‘000 units)
Q2
Q1
3.3 Lower production costs will cause the supply curve for gloves to shift outwards, and result in a fall in the market
price, and hence an increase in the area of consumer surplus.
4. When demand is price inelastic, consumer surplus is greater because individuals would be willing to pay well above
the market price for a good or service. When demand is price elastic, the opposite is true- consumers will switch
away from a given good/service if price moves much beyond the market price. If demand for a product is perfectly
elastic, then consumer surplus is zero.
Price
S
Price
S
P1
D
D
Quantity (‘000 units)
Quantity (‘000 units)
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