Consumer Producer Surplus Notes A Level IB
Consumer Producer Surplus Notes A Level IB
Consumer Producer Surplus Notes A Level IB
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Consumer Surplus
Price S
Consumer surplus is the difference PA •A
between the price the consumer is
willing to pay, and the market price
they are paying the good for.
PM
In the diagram, consumer A on the demand
curve is willing to pay a price of PA to acquire
the product. But because of the market
mechanism, he is able to acquire the product
at market price PM. As a result, he saved the
amount PA - PM (red arrow), which is his D
consumer surplus.
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Consumer Surplus
Price S
Similarly, consumer B on the demand
curve is willing to pay a price of PB to PA •A
acquire the product. But because of PB •B
the market mechanism, he is able to
acquire the product at market price
PM. Hence his consumer surplus is PM
indicated by the green arrow.
Consumer B gains a lower amount of
surplus compared to consumer A as
he is willing to pay less for the
product, so he ‘saved’ less. D
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Consumer Surplus
Price S
If we combine the consumer surplus
for each consumer on the demand
curve, total consumer surplus for the
market is the triangular area above
price, but below the demand curve.
P1
It shows the total additional value
gained by the consumers as they are
getting a lower market price than the
price they are willing to buy/demand
the good at. D
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Producer Surplus
Price S
Producer surplus is the difference
between what the price the
producer is willing to sell at, and the
market price they are actually
receiving from selling the good.
PM
In the diagram, producer A on the supply
curve is willing to sell his good at price PA.
But because of the market mechanism, he is
able to sell the good at market price PM. As a
result, he earned the additional amount PM - PA •A
PA (red arrow), his producer surplus. D
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Producer Surplus
Price S
Similarly, producer B on the supply
curve is willing to sell the good at
price PB. But because of the market
mechanism, he is able to sell it at
market price PM. Hence his producer
surplus is indicated by the green PM
arrow.
Producer B gains a lower amount of
surplus compared to consumer A as PB •B
he is hoping to sell to good for a PA •A
higher price, hence ‘earning’ less D
surplus from the market mechanism.
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Remember Producer & Consumer Surplus?
Price S
If we combine the producer surplus
for each producer on the supply
curve, total producer surplus is the
triangular area below price, but
above the supply curve. It shows the P1
additional value gained by the
producers as they are getting a
higher price than the price they are
willing to supply the good at.
D
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Producer & Consumer Surplus Practice
Price S
Where is producer surplus in the
diagram? Shade it orange
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Producer & Consumer Surplus Practice
Price S
Where is producer surplus in the
diagram? Shade it orange
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Change in Producer/Consumer Surplus
Price S
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Change in Producer/Consumer Surplus
Price S
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Change in Producer/Consumer Surplus
Price S
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Change in Producer/Consumer Surplus
Price S
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Change in Producer/Consumer Surplus
Price S
On the other hand, producer
surplus will increase as all
producers will be able to sell at
the higher government/monopoly C
price of PG. This can be shown by
PG •
the increase in the total producer PM
surplus area (orange).
Hence we can see both a change
in market price or quantity will
affect both consumer and
producer surplus. D
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Change in Producer/Consumer Surplus
Last thing to note is that the Price S
consumer/producer surplus lost
after the new price is set, is now
not ‘earned’ or received by
anyone (producer, consumer or C
the government). Because of that,
PG •
it can be defined as welfare loss or PM
deadweight loss. This area is
shaded in black.
When there is welfare loss, it
indicates that the market is
experiencing market failure and D
allocative inefficiency.
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Change in Producer/Consumer Surplus
Price S
Can you illustrate and explain the
impacts if the government or
monopoly set price is below the
market price?
What do you think will happen to PM
market quantity, consumer and PG
producer surplus?
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