Question

Try to come up with an example of one occasion when you experienced consumer surplus and one occasion when you experienced producer surplus (two different experiences because you cannot experience consumer and producer surplus at the same time). Explain in detail. How did your experiences affect you personally and how you felt when you purchased or sold the product. Also, explain what would happen to price, quantity, producer surplus, consumer surplus and deadweight loss when either a price floor, price ceiling or tax is imposed on a market (choose one). How would you explain the concept of deadweight loss in your own words? (Awswer in 200 words if possible please )

Answer 1

Consumer Surplus : Suppose I am willing to pay 20$ for a chocolate since I like the chocolate very much but the actual market price of the chocolate is 15$ . So here I receive a consumer surplus of 5$ .

Producer Surplus : Suppose I sell flowers . The minimum price that I am ready to accept for a bunch of roses is 10$ . If If I charge below 10$ I will incur loses . Now the market price of that same bunch is 15$ . So here I have a producer surplus of 5$ . This extra 5$ is like a reward that more than covers the cost of production .

Let us chose the example of price ceiling :

Price ceiling is the maximum price or the highest price that can be charged for a product . It is effective only when set below the equilibrium price . Price is not allowed to rise above the ceiling . This is imposed in order to protect consumers from skyrocketing prices .

Hence , price is below equilibrium price , this causes quantity demanded to be greater than quantity supplied . So there is a shortage in the market . Producer surplus falls due to lower price . Consumer surplus rises due to same reason .

Deadweight loss occurs since the market is not allowed to reach equilibrium .Deadweight loss is loss of total welfare or social surplus . Allocative efficiency is not achieved . Here loss of benefit to producers creates this burden .