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Consumer & Producer Surplus Consumer surplus: • Consumer surplus is the difference between what consumers are willing to pay for a good or service (indicated by the position of the demand curve) and what they actually pay (the market price). • So if the selling price was £10 and before I looked at the price I was willing to pay £15. My consumer surplus is £5. Consumer surplus and equilibrium Price 220 210 200 180 Demand 100 80 60 50 25 500 1000 2000 3000 Quantity What happens to consumer surplus when the price rises Price • Selling Price is now £100 200 Demand 100 50 25 500 1000 2000 3000 Quantity What happens to consumer surplus when the price rises Price Consumer Surplus decreases • Selling Price is now £100 • This is because there are less people willing to pay higher than the actual price. • There is a smaller difference between the price the remaining customers are willing to pay and the actual price. 200 Demand 100 50 25 500 1000 2000 3000 Quantity What happens to consumer surplus when the price falls Price Consumer Surplus increases • • This is because there are more people willing to pay a price higher than the actual price. Selling Price is now £25 200 Demand • There is a larger difference between the price the remaining customers are willing to pay and the actual price. 100 50 25 500 1000 2000 3000 Quantity Typical Exam question: • Using a diagram, explain the effect that a FALL in the price of a product will have on consumer surplus • Using a diagram, explain the effect that a RISE in the price of a product will have on consumer surplus A rise in price Price Demand P 500 1000 2000 3000 Quantity A rise in price means a fall in consumer Price surplus Lost consumer surplus Demand P1 P 500 1000 2000 3000 Quantity A fall in price Price Demand P 500 1000 2000 3000 Quantity A fall in price means a rise in consumer surplus Price Gained consumer surplus Demand P P1 500 1000 2000 3000 Quantity Now for Producer Surplus • It is shown by the area below the price and above the supply line. • It shows the difference between what producers got paid, and the price they were willing to sell at. Diagram of producer surplus Producer surplus Worksheet on showbie Tutor2u Paper 2 Q2(a)
