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Chapter 4: Problem 5

Distinguish between consumer surplus and producer surplus. How do these concepts relate to a country's economic welfare?

Short Answer

Expert verified
Consumer surplus is the difference between what consumers are willing to pay and what they actually pay, while producer surplus is the difference between the actual price received by producers and the lowest price they would be willing to accept. Both contribute to a country's economic welfare as bigger the areas under consumer and producer surplus, higher the economic efficiency and hence, the welfare. Economic policies often aim to maximize the total surplus to increase economic welfare.

Step by step solution

01

Definition of Consumer Surplus

Consumer surplus is an economic measure of consumer benefit, calculated as the difference between what consumers are willing to pay for a good or service and the actual price they pay. Mathematically, it is the area under the demand curve and above the price level.
02

Definition of Producer Surplus

Producer surplus is a measure of producer's benefit. It is calculated as the difference between the actual price a producer receives for a product and the minimum amount the producer would be willing to accept for it. Graphically, it is the area above the supply curve but below the price level.
03

Relation to Economic Welfare

Both consumer and producer surplus contribute to a country's economic welfare. The sum of consumer and producer surplus represents total welfare, and the larger these areas are in the economy, the greater the economic efficiency is. Thus, economic policies are often aimed at maximizing the total surplus (consumer surplus + producer surplus), which is also considered as the social welfare.

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