Question

0. Explain how buyers’ willingness to pay, consumer surplus, and the demand curve are
   related. Explain how sellers’ costs, producer surplus, and the supply curve are related.

Answer 1

Consumer surplus;

The difference between the maximum price consumers are willing to pay for a product and the actual price. ( In a competitive market, the
actual price will be the equilibrium or market price and, The maximum willingness to pay is the consumer’s marginal benefit for the good measurable in dollar terms).

Consumer surplus is shown graphically as the area under the demand curve and above the equilibrium price. Ie. Consumer surplus and price are inversely related – all else equal, a higher price reduces consumer surplus. (Refer Graph)

While,

Producer surplus Is the difference between the actual price producers receive and the minimum acceptable price.

Refer Above Graph:

Producer surplus is shown graphically as the area above the supply curve and below the equilibrium price. Producer surplus and price are directly related – all else equal, a higher price increases producer surplus.