Consumer surplus
Difference between willingness to pay and price paid.
Consumer and producer surplus
Key definitions
Producer surplus
Difference between price received and minimum acceptable price.
Equilibrium
S = D.
Willingness to pay
Maximum price a consumer would pay.
Minimum supply price
Lowest price a producer would accept.
Tax
Can reduce consumer surplus.
Subsidy
Can increase consumer surplus.
Shift in demand
Changes both surpluses.
Shift in supply
Changes both surpluses.
Welfare
Total surplus measures market benefit.
Deadweight loss
Lost surplus from inefficiency.
Key concepts
Consumer surplus is the triangle above price, below demand.
Producer surplus is the triangle below price, above supply.
Indirect taxes reduce consumer surplus and change incidence.
Relevant tips
- Shade CS and PS clearly on diagrams in exams.