Tejvan PettingerNovember 28, 2017

Definition of Consumer Surplus

Definition of producer surplus

Diagram of Consumer Surplus

How elasticity of demand affects consumer surplus

If demand is price inelastic, then there is a bigger gap between the price consumers are willing to pay and the price they actually pay.

The demand curve shows the maximum price that a consumer would have paid. Consumer surplus is the area between the demand curve and the market price.

If the demand curve is inelastic, consumer surplus is likely to be greater

Consumer surplus and marginal utility theory

The demand curve illustrates the marginal utility a consumer gets from consuming a product. At quantity 500 litres, the marginal utility is £0.80 – which indicates the marginal utility is 80p. However, with a price of 50p, the consumer surplus is the difference.

Producer Surplus

How free trade affects consumer and producer surplus

Free trade means a reduction in tariffs. It leads to lower prices for consumers and an increase in consumer surplus


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