9708 · 2.5
Consumer and producer surplus flashcards
Revision flashcards for Cambridge 9708 Consumer and producer surplus (syllabus 2.5). Flip, recall, then mark a real past-paper question.
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What is consumer surplus?
The difference between what consumers are willing to pay and what they actually pay — area below demand, above market price.
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What is producer surplus?
The difference between the market price and the minimum price producers would accept — area above supply, below market price.
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What is total economic surplus?
Consumer surplus + producer surplus — maximised at free-market equilibrium with no distortion.
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What is deadweight loss?
Lost surplus from market distortion (tax, price control) — the triangle between supply and demand over the lost trade.
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How does an indirect tax affect surplus?
Reduces both consumer and producer surplus; creates deadweight loss; government gains tax revenue.
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How does a price ceiling below equilibrium affect surplus?
Creates shortage; reduces producer surplus; some consumers gain (lower price) but others lose (cannot buy) — net welfare loss.
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Define consumer surplus.
The difference between the maximum price a consumer is willing to pay for a good and the actual price they pay. It is the area below the demand curve and above the market price.
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Define producer surplus.
The difference between the market price a producer receives for a good and the minimum price they are willing to accept. It is the area above the supply curve and below the market price.
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What is meant by 'economic welfare' in the context of surplus?
Economic welfare (or community surplus) is the total benefit to society from a market. It is calculated as the sum of consumer surplus and producer surplus.
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What is a deadweight loss?
A deadweight loss is the loss of economic welfare that occurs when the market is not at its allocatively efficient equilibrium. It represents the value of trades that no longer occur due to a market distortion like a tax or price control.
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How does a price ceiling (maximum price) affect producer surplus?
A price ceiling set below the equilibrium price will always reduce producer surplus. Producers receive a lower price and sell a smaller quantity, shrinking the area of producer surplus.