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Chapter 3: Q.31 (page 78)

What is consumer surplus? How is it illustrated on a demand and supply diagram?

Short Answer

Expert verified

The difference between what consumers would have been prepared to pay and what they actually spent is used to determine the extra benefit consumers receive from acquiring a good or service.

Step by step solution

01

Concept introduction

Consumer surplus is the additional advantage consumers gain from purchasing a good or service, calculated as the difference between what they would have been prepared to pay and what they actually spent.

02

Explanation of solution

Consumer surplus is the extra benefits consumers receive from buying a good or service, as measured by the difference between what they would have been willing to pay and what they actually paid.

Consumer surplus is the space below the demand curve and above the equilibrium price level, as shown in the diagram.

The consumer surplus is represented by the triangle APE in the diagram above.

03

Example of concept

In the preceding picture, if the equilibrium price is 'P', the purchasers who were willing to pay more than the equilibrium price receive consumer surplus since they may purchase the good at a lower price than they were proposing. The consumer surplus is represented by the area of the triangle APE.

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Most popular questions from this chapter

  1. Many changes are affecting the market for oil. Predict how each of the following events will affect the equilibrium price and quantity in the market for oil. In each case, state how the event will affect the supply and demand diagram. Create a sketch of the diagram if necessary.
    a. Cars are becoming more fuel efficient, and therefore get more miles to the gallon.
    b. The winter is exceptionally cold.
    C. A major discovery of new oil is made off the coast of Norway.
    d. The economies of some major oil-using nations, like Japan, slow down.
    e. A war in the Middle East disrupts oil-pumping schedules.
    f. Landlords install additional insulation in buildings.
    g. The price of solar energy falls dramatically.
    h. Chemical companies invent a new, popular kind of plastic made from oil.

Why would a free market never operate at a

quantity greater than the equilibrium quantity? Hint:

What would be required for a transaction to occur at that

quantity?

In an analysis of the market for paint, an economist discovers the facts listed below. State whether each of these changes will affect supply or demand, and in what direction.

  1. There have recently been some important cost-saving inventions in the technology for making paint.
  2. Paint is lasting longer, so that property owners need not repaint as often.
  3. Because of severe hailstorms, many people need to repaint now.
  4. The hailstorms damaged several factories that make paint, forcing them to close down for several months.

What is total surplus? How is it illustrated on a

demand and supply diagram?

Name some factors that can cause a shift in the demand curve in markets for goods and services.
See all solutions

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