9. Supply and Demand & Consumer/Producer Surplus | Summary and Q&A

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July 16, 2020
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9. Supply and Demand & Consumer/Producer Surplus

TL;DR

Consumer surplus measures the extra benefit consumers gain from a good, while producer surplus measures the extra profit producers earn. Both surpluses can be influenced by factors such as price changes, demand elasticity, and the efficiency of production.

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Questions & Answers

Q: How is consumer surplus calculated?

Consumer surplus is determined by the difference between the willingness to pay for a good and the price at which it is sold. It is measured as the area under the demand curve and above the actual price.

Q: Why does consumer surplus decrease when the price of a good increases?

When the price of a good increases, consumers are willing to pay less for it. This decreases the difference between their willingness to pay and the actual price, resulting in a decrease in consumer surplus.

Q: What is the relationship between demand elasticity and consumer surplus?

Consumer surplus is influenced by the elasticity of demand. The more inelastic the demand, the higher the consumer surplus, as consumers are willing to pay more for the good.

Q: How is producer surplus related to profits?

In the long run, under perfect competition, producer surplus is equal to zero, as firms cannot earn profits. However, in situations with heterogeneous firms, barriers to entry, or upward-sloping input supply curves, producer surplus can exist, indicating profit potential.

Summary & Key Takeaways

  • Consumer surplus is the difference between the willingness to pay for a good and its price, representing the extra benefit consumers receive.

  • Producer surplus is the difference between the willingness to supply a good and its price, representing the extra profit earned by producers.

  • Surpluses can be affected by changes in price, demand elasticity, and efficiency of production.

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