Question

Graph & label  all the parts for: 1) Consumer Surplus & 2) Producer Surplus.  Define both and discuss (in your own words) the economic implications of both. These can be on the same graph.

Answer 1

1) CONSUMER SURPLUS

Consumer surplus is the situation where the consumer pays less than the the current price. Consumer surplus is thus the difference between the amount they willing to pay and they actually pays. From the view point of customers this is beneficial for them. The consumer surplus and price of commodity has inverse relationship. Because as price falls consumer amount increases. In the situation where the demand for a good is perfectly elastic then the consumer surplus will be zero. Thus consumer surplus is the extra benefit surplus by customers. consumer surplus is also called as economic welfare. It is tool used by small enterprises to attract the customers. enterprises reive benefit through the surplus they spend more and more to purchase than earlier. It is also known as social surplus.

If the consumer is willing to pay a higher amount than th price prevailed for that product in Market the consumer surplus will remains positive. Producers make use of the advantage of consumer surplus when they fixes the price.

2) PRODUCER SURPLUS

Producer surplus is refers to the surplus amount received by the Ashley a of through selling a particular product. According to the increase in the price o commodity the producer surplus increases and consumer surplus falls and vise versa. It is the good between market price difference supply curve. High price and demand for a product may lead to higher producer surplus. It is a measure which shows the welfare of a producer. Producer surplus increases according to the increase in price of good and production. The sum of producer surplus and consumer surplus shows the total economic welfare. It is the utility, benefit, extra money that producers able to get by selling the good.

Producer surplus = total revenue - total cost

Here nada the above equation the cost of production is the total cost. and the benefit earned by the producers is the total revenue. The variable cost are subtracted from the revenue to subtracted producer surplus. Thus it is not same as profit. The equilibrium price and producer surplus are directly determine . As price increases the producer surplus also proportional.

In the above graph the area above the market price and under the demand curve is consumer surplus. And producer surplus is the area above the price of supply and under the market price. At the Equilibrium point the Society enjoys maximum benefit. If the volume of production is low then consumer and producer surplus will be less. If both the surplus is maximum then the market is said to be efficient.