- Understanding the concept of surplus is essential when discussing the probable effects of a price change. Two types of surplus exist in economic modeling – producer surplus and consumer surplus. Producer surplus examines the benefits a supplier gains from selling goods and services in the market. Consumer surplus represents the benefit consumers receive when they purchase a good or service.
- Changes in pricing along the demand curve primarily affect consumer surplus. This is because the demand curve is a representation of how much consumers are willing to pay for a specific good or service. In the instance of consumer surplus, a reduction in pricing will generally benefit consumers resulting in an increase in consumer surplus. For instance, consider the benefit gained by purchasing a desired good or service at a discount.
- Depending on how a supplier reacts, falling prices along the demand curve can result in a reduction or an increase in producer surplus. For instance, producer surplus will decrease as the price of the product nears the original cost to purchase or manufacture the good. This loss in producer surplus is transferred to consumers, resulting in an increase in consumer surplus. Producers can increase their surplus by finding ways to cut costs, such as reduced labor costs or the introduction of new technology.
- Market mechanisms, such as demand and supply, work together to move toward market equilibrium. This results in an efficient use of the resources available to both consumers and producers. In addition to a reduction in price, other factors can influence the amount of consumer and producer surplus received from goods or services. Changes in consumer income and shifts in overall consumer demand impact both consumer and producer surplus. These changes are related to the price consumers are willing to pay, which changes over time.
Surplus Basics
Consumer Surplus
Producer Surplus
Considerations
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