<2.5 CONSUMER & PRODUCER SURPLUS>

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"That's right! Thanks to the forces of demand and supply, the free-market-determined price resulted in both parties receiving a benefit or a monetary 'surplus of benefit' equal to the difference between what they were willing to pay/receive and what they actually paid/received (£10 gain for the buyer and £9 for the seller)."

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"Let's look at the buyer-side first: the difference between what the consumer above was willing to pay for the 1st unit of the good (£20) and the price he actually paid for it (£10) is referred to as 'CONSUMER SURPLUS', and if we looked at a demand curve, it would be represented by the area below the demand curve and above the actual price."

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--TASK--

"Look at the individual demand diagram below and explain why @ a price of $2, consumer surplus totals $12. Also comment on the relationship between price and consumer surplus." 

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"Let's also look at a market demand curve example."

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"Now let's look at the seller-side: the difference between what the producer is willing to receive (his 'supply curve') and the price they actually received is referred to as PRODUCER SURPLUS, and if we looked at a supply curve, it would be the area above the supply curve and below the actual price." 

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"Let's also look at a market demand curve example."

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"That's right, the 'TSS IS MAXIMISED @ EQUILIBRIUM', and any output level below Qe will result in LOST BENEFIT, which is referred to as a 'DEADWEIGHT LOSS'."

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"For a price ceiling, we know that this raises the price received by producers, increasing PS on the units that are still sold; however, the higher prices cause quantity demanded, and therefore the quantity actually sold, to fall, meaning producers lose the PS they previously earned on these units that are no longer sold.”

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“If the gain in PS from the higher price is greater than the loss in PS from fewer sales, PS rises, but if the loss from fewer sales is greater than the gain from the higher price, PS falls.”

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"Select the 'show gains and losses' box, and set the price to $20 to see the loss in CS relative to the gain."

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--TASK--

"Now rewrite this for a price floor."

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"If DEMAND for the good rises or falls (let's stick to parallel shifts only), this, of course, will impact the price and equilibrium quantity, which will in turn impact CS, PS and TSS."

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--TASK--

"Sketch a diagram showing an increase and a decrease in demand, then use the slider below to help you determine the impact of a 'parallel' increase or decrease in demand on CS, PS, and TSS. Then summarise your findings."

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"That's right; an increase in demand increases both CS and PS, whilst a decrease in demand decreases both CS and PS."

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"If SUPPLY for the good rises or falls (let's stick to parallel shifts only), this, of course, will impact the price and equilibrium quantity, which will in turn impact CS, PS and TSS."

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--TASK--

"Sketch a diagram showing an increase and a decrease in supply, then use the slider below to help you determine the impact of a 'parallel' increase or decrease in supply on CS, PS, and TSS. Then summarise your findings."

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"That's right; an increase in supply increases both CS and PS, whilst a decrease in supply decreases both CS and PS."

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"The relative elasticities of demand and supply can significantly affect the magnitude of changes in consumer surplus (CS) and producer surplus (PS). For parallel shifts in demand and supply, they do not change the direction of these changes. However, with binding maximum and minimum prices, elasticity can also determine whether the intended beneficiaries gain or lose surplus."

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"Let's look at a PRICE CEILING first."

"Surely, if PED is relatively ELASTIC, the higher price will cause a LARGER FALL in Qd, meaning producers will sell considerably FEWER UNITS. Therefore, the loss of PS from reduced sales is more likely to outweigh the gain from the higher price, causing PS to FALL."

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"Conversely, if PED is relatively INELASTIC, the higher price causes a SMALLER FALL in Qd, meaning producers will LOSE FEWER SALES, making it more likely that the gain in PS from the higher price will outweigh the loss from reduced sales, causing PS to RISE."

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"But what about PES? 

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"If supply is relatively ELASTIC, producers respond to the higher price by increasing Qs considerably. However, does this mean they actually SELL more units?"

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**"NO! They can only sell what consumers are willing to buy at that price! A more elastic supply curve means a LARGER SURPLUS (Qs − Qd), but it does NOT mean a larger fall in the quantity actually sold."**

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**"Therefore, PED directly influences the reduction in sales caused by a minimum price, while PES influences the size of the surplus and the production costs of the units still sold. Both can affect the change in PS, but through different mechanisms."**

--TASK Pt. 1--

"Click on 'Demand increases', then slide 'Demand responsiveness' to the right. What do you notice about the impact on CS and PS? "

When demand increases, both consumer surplus and producer surplus increase. However, the relative elasticities of demand and supply affect how the additional surplus is distributed between consumers and producers.

"That's right the greater the PED value (The more elastic), the greater the increase in CS and PS, and vice versa