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Demand and Supply in Product Markets

The determination of equilibrium price: Consumer and producer surplus on the diagram

  • 3 things to know
  • AS Units 1 and 2

Overview

Recall questions on Consumer and producer surplus on the diagram.

What you need to know

Answer each one before you reveal it.

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Key term

How is consumer surplus represented on a supply and demand diagram?

Key term

What is significant about the combined total of consumer and producer surplus at free market equilibrium?

Key term

In the consumer surplus formula, what does the 'height' of the triangle represent?

Questions from this subtopic

Each one with the model answer underneath.

  1. 1

    How is consumer surplus represented on a supply and demand diagram?

    Model answer

    Consumer surplus is represented by the triangular area below the demand curve and above the equilibrium price line.

  2. 2

    How is producer surplus represented on a demand and supply diagram?

    Model answer

    It is shown as the triangular area above the supply curve and below the equilibrium price line.

  3. 3

    Why does the area representing producer surplus lie above the supply curve?

    Model answer

    Because the supply curve shows the minimum price producers are willing to accept; any price received above that minimum represents a surplus gain for producers.

  4. 4

    What is significant about the combined total of consumer and producer surplus at free market equilibrium?

    Model answer

    At the free market equilibrium, the combined total of consumer surplus and producer surplus is maximised.

  5. 5

    State the formula for calculating consumer surplus as a triangular area.

    Model answer

    Consumer Surplus = ½ × base × height, where the base is the equilibrium quantity and the height is the difference between the maximum willingness to pay and the equilibrium price.

  6. 6

    In the consumer surplus formula, what does the 'height' of the triangle represent?

    Model answer

    The height represents the difference between the maximum price consumers are willing to pay and the equilibrium price.

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AThe demand curve shifts to the left.
BExcess supply exists at the original price.
CPrice falls until a new equilibrium is reached.

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