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You are expected to explain/analyze (AO2) and draw (AO4) consumer, producer, and social/community surplus (SL+HL), explain/analyze (AO2) allocative efficiency (SL+HL), and calculate (AO4) consumer and producer surplus from a diagram (HL)
Consumer and Producer Surplus (AO2, AO4)
Consumer and Producer Surplus (AO2, AO4)
Consumer Surplus:
Sometimes you are willing to pay a high price for a product, but don't have to, because the price is low. This means you have a consumer surplus.
Consumer surplus refers to the gain of all consumers who can consume a product at a lower price than what they were willing and able to pay.
Producer Surplus:
Sometimes firms are willing to sell a product for a low price, but don't have to, because the price is high. This means they have a producer surplus.
Producer surplus refers to the gain of all producers who can produce a product at a higher price than what they were willing and able to earn.
The following diagram shows how to draw consumer and producer surplus (you need to know what to label which triangle):
Consumer surplus is represented by the top triangle
Producer surplus is represented by the bottom triangle
Social/Community Surplus (AO2, AO4)
Social/Community Surplus (AO2, AO4)
The social surplus/community surplus simply refers to the sum of consumer and producer surplus. This means it is the combination of the two triangles from the diagrams above.
The social surplus is maximized when there is no excess supply or demand, and the market is allocatively efficient. What does "allocative efficiency" mean? Scroll further down to find out!
Allocative Efficiency (AO2)
Allocative Efficiency (AO2)
Allocative efficiency is the situation where the social surplus is maximized.
No one (neither producers nor consumers) can be better off without others being worse off.
Allocative efficiency occurs when the price mechanism works to create a market equilibrium.
At this point, the additional gain for society ("marginal benefit" (MB)) that one more good/service brings, equals the additional loss for society ("marginal loss" (MC)).
Calculations (AO4) (HL Only)
Calculations (AO4) (HL Only)
As an HL student, you are also expected to calculate consumer and producer surplus, given a diagram. This may sound scary, until you realize it's just a matter of calculating the area of the two triangles:
Calculating consumer surplus:
Calculating producer surplus:
And should you ever need to calculate social surplus, just add the two triangles together!
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