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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. ______________________________________________________________________________________ ______________________________________________________________________________________ ______________________________________________________________________________________ ______________________________________________________________________________________ ______________________________________________________________________________________ _____________________________________________________________________________________ www.a-zbusinesstraining.com 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) www.a-zbusinesstraining.com