Questions and Answers
What is the difference between the price a consumer pays for a good/service and what they would be willing to pay, rather than do without it?
How can a concert venue owner increase revenue and profits?
Why do some consumers willing to pay more for the same good or service?
What is an example of something extra that an airline could offer to extract consumer surplus from willing customers?
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What is the goal of extracting consumer surplus through offering something extra?
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What is the producer surplus on the tenth unit if the seller would have accepted €10 for it but received the market price of €30?
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Why do producers gain a surplus by selling at the market price?
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How is the total producer surplus calculated using a price vs qauntity graph?
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What is the producer surplus on the twentieth unit if the seller would have accepted €20 for it but received the market price of €30?
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Study Notes
Consumer Surplus
- Consumer surplus is the difference between what a consumer actually pays for a good/service and what they would be willing to pay, rather than do without it.
Calculating Consumer Surplus
- The consumer surplus is calculated by finding the difference between what a consumer is willing to pay and what they actually pay.
- Example: a customer willing to pay €50 but gets the good for €30 has a consumer surplus of €20.
- To find the total consumer surplus, the area of the shaded triangle is calculated.
Total Consumer Surplus
- In the example, the total consumer surplus is €450.
Real-World Applications
Concert Venue Example
- A concert venue owner can increase revenue and profits by selling tickets at different prices for the same event.
- By offering something extra (e.g. meet and greet, VIP package), the venue owner can extract the consumer surplus (e.g. €30) and increase profits.
Airlines Example
- Airlines can charge passengers different prices for the same flight by offering extra services.
- By offering extras (e.g. advance seat selection, priority boarding, access to a lounge), airlines can extract the consumer surplus from passengers willing to pay more.
Producer Surplus
- Producer surplus is the difference between the minimum acceptable price and the actual market price received by the seller.
- It represents the benefit or profit gained by the producer from selling a good or service at the market price.
- Example: the seller would have accepted €10 for the tenth unit, but received €30, resulting in a producer surplus of €20 on that unit.
- Another example: the seller would have accepted €20 for the twentieth unit, but received €30, resulting in a producer surplus of €10 on that unit.
- Total producer surplus is calculated by finding the area of the shaded triangle on the supply and demand curve graph.
- In this case, the total producer surplus is €450.
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Description
Learn about consumer surplus, the difference between what a consumer pays and what they're willing to pay, and how to calculate it. Understand the concept with examples.
