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Consumer	
  and	
  Producer	
  Surplus	
  
EdExcel	
  Economics	
  1.2.8	
  
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	
  
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	
  
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)	
  
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	
  
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	
  
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)	
  
Consumer	
  and	
  Producer	
  Surplus	
  
EdExcel	
  Economics	
  1.2.8	
  

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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  
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