Question

2. Consumer Surplus and Producer Surplus Explain in words and graphically how consumer surplus, producer surplus and total surplus change when the minimum wage is removed. Assume the minimum wage is above the free market price. In your explanation please interpret the components of the changes in consumer surplus, producer surplus and total surplus; i.e. what each component represents. For additional points, what happens if the minimum wage is set below the free market price? please graph

Answer 1

Consumer Surplus: It measures the benefit buyers receive from participating in a market. The benefit is measured by the difference between the willingness to pay and what he is actually paying.

Consumer surplus is the area above price and below the demand curve.

Producer surplus: It measures what sseller receive ffrom participating in a market.

The area below the price and above the supply curve measures the producer surplus in the market. The height of the supply curve measures seller's cost and the difference be the price ad cost of Production iis each seller's producer surplus.

Now assuming minimum wage is above free market price. As minimum wage is a price floor, it causes surplus and therefore the result is unemployment.

Now the CS,PS,TS in case of minimum wage and free market wage are shown below-

Now let's see what happens if the minimum wage is set below free market price-