Consumer & Producer Surplus (AS/A LEVELS/IB/IAL)

Consumer & Producer Surplus (AS/A LEVELS/IB/IAL)

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Consumer Surplus

Definition

Consumer surplus represents the difference between the price a consumer is paying for a good and the highest price he is willing to pay.

Producer Surplus

Definition

Producer surplus represents the difference between the price a producer receives for a good and the lowest price he is willing to accept.

Consumer & Producer Surplus Areas:

Consumer surplus = PE, A, C

Producer surplus = PE, B, C

 

Consumer & Producer Surplus – Impact of shifts

A reduction in advertising by a firm could lead to a decrease in demand for a firms products from D to D1. This would cause a change in consumer and producer surplus.

 

What’s the Impact of a demand shift to the left on consumer and producer surplus?

  • Original Consumer Surplus = PE,Q,R
  • New Consumer Surplus = P1, S, U
  • Change in consumer surplus = PE,Q,R – P1, S, U

 

  • Original producer surplus = PE, Q, T
  • New producer surplus = P1, S, T
  • Change in producer surplus = PE, P1, S, Q

 

A government subsidy to a firm would cause the supply curve to shift to the right. This would cause a change in consumer and producer surplus.

 

What’s the Impact of a supply shift to the right on consumer and producer surplus?

  • Original consumer surplus = PE, A, E
  • New consumer surplus = P1, A, C
  • Change in consumer surplus = PE, P1, C, E

 

  • Original producer surplus = PE, E, D
  • New producer surplus = P1, C, B
  • Change in producer surplus = PE, E, D – P1, C, B
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