a) The distinction between consumer and producer surplus
Consumer surplus – difference between price a consumer is willing to pay for a good or service and price they actually pay (market/equilibrium price).
• Point at which the demand curve crosses y-axis (price) – represents highest price someone in the market is willing to pay
Producer surplus – difference between price a producer is willing to sell a good for and actual price they actually receive (equilibrium/market price).
• Represented on diagram by shaded area above supply curve and below market price
b) The use of supply and demand diagrams to illustrate consumer and producer surplus
c) How changes in supply and demand might affect consumer and producer surplus
2 ways a consumer and producer surplus diagram may change:
• A change in the market/equilibrium price • A shift in the demand curve
Diagram beside – consumer surplus will increase by shaded area BCEF. The new area of consumer surplus is now AEF