Questions and Answers
What is the definition of consumer surplus?
The difference between what a consumer actually pays for a good/service and what they would be willing to pay, rather than do without the good/service.
Calculate the consumer surplus for the 10th customer who is willing to pay €50 but gets the good for €30.
€20
Why do consumers experience surplus when they pay a lower price than their maximum willingness to pay?
Because they get the good or service at a lower price than they were willing to pay, resulting in a gain in value or utility.
What is the benefit of calculating consumer surplus?
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How can the owner of a concert venue increase revenue and profits from selling tickets for the same event?
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What is an example of something extra that a concert venue owner could offer to extract consumer surplus?
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Why would some fans be willing to pay more than the standard ticket price of €50?
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What is the benefit to the concert venue owner of charging different prices for the same event?
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How does offering different prices for the same event affect the fans who are willing to pay more?
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How can an airline increase revenue by charging different prices for the same flight?
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What is the benefit of an airline offering additional services to certain passengers?
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Why do some passengers pay more for the same flight?
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What is the result of an airline charging the same price to all passengers?
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What is the difference between the price a producer would have accepted for a good or service and the price the seller actually receives?
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What is the producer surplus on a unit when the seller would have accepted €10 but received the market price of €30?
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How is the total producer surplus calculated when the seller charges all customers the market price?
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What is the total producer surplus gained by charging all customers €30?
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What is the advantage of finding the producer surplus?
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Study Notes
Consumer Surplus
- Consumer surplus is the difference between the maximum amount a consumer is willing to pay for a good or service and the actual market price they pay.
Calculation of Consumer Surplus
- Example: 10th customer willing to pay €50, but got the good for €30, so consumer surplus is €20.
- Example: 20th customer willing to pay €40, but got the good for €30, so consumer surplus is €10.
- To find total consumer surplus, calculate the area of the shaded triangle.
Total Consumer Surplus
- Total consumer surplus for all consumers who got the item for €30, but were willing to pay more, is €450.
Price Discrimination in Concert Venues
- Selling tickets at different prices for the same event can increase revenue and profits for concert venue owners.
- Charging a uniform price (e.g., €50) may leave potential profit on the table, as some fans are willing to pay more (e.g., €80).
- Offering extra amenities or services (e.g., meet and greet, VIP package) enables the venue owner to capture the consumer surplus (e.g., €30) and increase profits.
Airlines' Pricing Strategies
- Airlines charge passengers different prices for the same flight.
- The airline could charge a uniform price to all passengers, e.g. €45.
- Some passengers are willing to pay more for a flight, creating a consumer surplus.
- Airlines offer additional services to extract some of the consumer surplus from those willing to pay more.
- Examples of additional services offered by airlines include:
- Advance seat selection
- Priority boarding
- Access to a lounge
Producer Surplus
- Producer surplus is the difference between the minimum price a producer would accept for a good or service and the market price they receive.
- It represents the gain or profit made by a producer when they sell a product at a market price that is higher than the minimum price they would have accepted.
Calculating Producer Surplus
- The producer surplus for a single unit is calculated by subtracting the minimum price the producer would accept from the market price.
- For example, if the producer would have accepted €10 for the tenth unit but received the market price of €30, the producer surplus is €20.
- If the producer would have accepted €20 for the twentieth unit but received the market price of €30, the producer surplus is €10.
Total Producer Surplus
- The total producer surplus is calculated by finding the area of the shaded triangle in the supply and demand graph.
- In this case, the total producer surplus is €450.
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Description
Understand the concept of consumer surplus in microeconomics, including how it's calculated and its significance in consumer behavior.