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Consumer and Producer Surplus (Consumer Surplus (Price Elasticity of…
Consumer and Producer Surplus
Consumer Surplus
Definition
It is the difference between what a consumer paid and what it would of been willing to pay.
The demand curve shows the maximum price the consumer would of been willing to pay.
The price the consumer paid is the equilibrium price.
Price Elasticity of Demand
If the demand curve is
inelastic
, the consumer surplus is greater
The price consumers are willing to pay are much higher
Marginal Utility
The greater the marginal utility of a good --> the greater the consumer surplus
We receive great satisfaction from this good so we are willing to a higher price to get it
Firms can influence/ change the consumer surplus if the have market power
A monopoly will try to raise prices as high as possible, reducing consumer surplus
Producer Surplus
Definiton
It is the difference between the price producers are willing to supply a good or service for and the price they receive
Measure of producer welfare
Some producers are willing and able to produce goods at below the equilibrium price, but they receive the equilibrium price, creating
economic welfare
Community Surplus
Definiton
It is the aggregate consumer and producer surplus
This is the total social welfare
Community surplus is maximised at the equilibrium price
This is also the point at which the economy is most
Allocatively efficient
Allocatively efficient is a state of the economy in which production represents consumer preferences
