Economics – Consumer and producer surplus | e-Consult

(a) Consumer surplus is the difference between what consumers are willing to pay for a good and what they actually pay. A change in demand affects consumer surplus by altering the quantity demanded at each price level.

• An increase in demand leads to a higher equilibrium price and quantity. Consumers are willing to pay more and the quantity they buy increases, resulting in a larger consumer surplus.
• A decrease in demand leads to a lower equilibrium price and quantity. Consumers are willing to pay less and the quantity they buy decreases, resulting in a smaller consumer surplus.

The diagram shows that an increase in demand shifts the demand curve to the right, leading to a higher equilibrium price and quantity. This results in a larger area representing consumer surplus.

(b) Factors that might cause a change in demand include:

• Changes in consumer income (normal goods). An increase in income increases demand.
• Changes in consumer tastes and preferences. A new health trend might increase demand for organic food.
• Changes in the price of related goods. If the price of a substitute good increases, demand for the original good increases.
• Changes in consumer expectations about future prices. If consumers expect prices to rise, demand increases now.
• Changes in the demographics of the population. An aging population might increase demand for healthcare products.

(c) Consumer and producer surplus are related because a change in consumer surplus often leads to a change in the equilibrium price and quantity. This, in turn, affects the producer surplus.

• An increase in consumer surplus (due to increased demand) typically leads to a higher equilibrium price. This increases producer surplus as producers receive a higher price for their goods.
• A decrease in consumer surplus (due to decreased demand) typically leads to a lower equilibrium price. This decreases producer surplus as producers receive a lower price for their goods.

The diagram illustrates this relationship – a shift to the right in demand increases both consumer and producer surplus.