Consumer Surplus Flashcards

Questions and Answers

What is consumer surplus?

Consumer surplus is a measure of the welfare that people gain from buying and consuming goods and services, defined as the difference between the price consumers are willing to pay and the price they actually pay.

What happens to consumer surplus when demand is perfectly price elastic?

Consumer surplus is infinite

Consumer surplus stays constant

Consumer surplus varies with price

Consumer surplus is zero (correct)

When demand is perfectly price inelastic, what happens to consumer surplus?

Consumer surplus decreases with price

Consumer surplus is constant

Consumer surplus is infinite (correct)

Consumer surplus is zero

Match the scenarios with the consumer surplus effect:

Inelastic demand = High level of consumer surplus Elastic demand = Low level of consumer surplus Increase in market demand = Rise in consumer surplus Higher supply costs = Fall in consumer surplus Signup and view all the answers

What is producer surplus?

Producer surplus is the difference between the price producers are willing to supply a product for and the price they actually receive in the market. Signup and view all the answers

What does an increase in market demand lead to regarding producer surplus?

Higher price and quantity, rise in producer surplus Signup and view all the answers

What is community surplus?

Community surplus, also known as social surplus, is the sum of consumer and producer surplus at a given price and quantity in a market. Signup and view all the answers

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.