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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)