Question

Explain what ‘consumer surplus” and “producer surplus” are , and why they are important concepts

Answer 1

Answer :-

Consumer Surplus :- It may be defined as the difference between what consumers are willing and able to pay for a good and what they actually pay for the good.

Consumer surplus measures the benefit that buyers get from participating in a market.

Consumer surplus can be computed by finding the area below the demand curve and above the price.

Why it is important concept :-

Consumer Surplus is an important concept because it allows quntitative analysis of the impact of a price change on consumers welfare.

Producer Surplus :- It may be defined as the difference between what a producer is willing to receive and what they actually receive.

Producer Surplus is the area above the supply curve but below the price, for all units sold.

For example :- Smith was willing to sell a dress at $50 but got $90. Her producer surplus was $40.

Why it is important concept :-

Producer Surplus is an important concept because in any business, when it raises its price, for each transaction producer surplus also increases. Customers are not able to buy products at high prices, if they have to start with a small amount of surplus, so the business should expect smaller sales if they increases prices.