Consumer Surplus Flashcards

Study Notes

Consumer Surplus

Represents the welfare gained by consumers from purchasing goods and services.
Calculated as the difference between the maximum price consumers are willing to pay and the actual market price.
Graphically depicted as the area under the demand curve and above the market price.
Fluctuates with changes in market prices.

Consumer Surplus and Price Elasticity of Demand

Perfectly price elastic demand results in zero consumer surplus; consumers pay exactly what they're willing.
Perfectly price inelastic demand results in infinite consumer surplus; quantity demanded remains constant regardless of price.
Downward sloping demand curves usually exhibit varying consumer surplus levels.
Inelastic demand indicates higher potential consumer surplus; elastic demand typically shows lower consumer surplus.

Price Discrimination and Consumer Surplus

Producers can convert consumer surplus into producer surplus through price discrimination.
Enables sellers to charge different prices to different consumer groups based on willingness and ability to pay.
Aims to increase revenue and profits by maximizing the extraction of consumer surplus.

Changes in Supply and Demand, Market Price, and Consumer Surplus

Increased supply costs elevate market prices, leading to decreased consumer surplus.
Increased market demand results in higher consumer surplus due to enhancement in market conditions.

Producer Surplus

Defined as the difference between the minimum price producers are willing to accept and the actual market price received.
Illustrated by the area above the supply curve and below the market price.
Higher prices incentivize business expansion and increased supply, driven by profit motives.

Changes in Demand and Supply, Market Price, and Producer Surplus

Lower supply costs reduce prices and increase equilibrium quantity, thus raising producer surplus.
Increased market demand raises both price and quantity, contributing to increased producer surplus.

Price Elasticity of Supply and Producer Surplus

Inelastic supply corresponds with high levels of producer surplus.
Elastic supply indicates lower levels of producer surplus, reflecting sensitivity to price changes.

Community Surplus

Also referred to as social or society surplus; the total of consumer and producer surplus at specific market conditions.
Achieves maximum levels at free market equilibrium prices, indicating allocative efficiency.
When community surplus is maximized, resources are optimally allocated with no alternative price/output combinations available to enhance it.

Description

Explore key concepts related to consumer surplus with these flashcards. Understand the differences between what consumers are willing to pay and what they actually pay in the market. Ideal for students looking to deepen their knowledge of economic welfare.