AQA A-Level Economics (7136) · The Operation of Markets
Specification points
- Consumer and producer surplus and how they are shown on a diagram.
- The effects of changes in supply and demand on surplus.
- The impact of indirect taxes and subsidies on surplus.
Surplus
- Consumer surplus is the difference between what consumers are willing to pay and what they actually pay — the area below the demand curve and above the price.
- Producer surplus is the difference between the price producers receive and the minimum they would accept — the area above the supply curve and below the price.
Together they measure the welfare generated by a market.
Key definitions
| Term | Definition |
|---|---|
| Consumer surplus | The gain to consumers from paying less than they were willing to. |
| Producer surplus | The gain to producers from receiving more than their minimum acceptable price. |
| Welfare loss | The loss of total surplus when output is not at the efficient level. |
Changes in surplus
- A fall in price (e.g. from higher supply) raises consumer surplus.
- A rise in demand raises price and can raise producer surplus.
- More elastic curves change the size of surplus areas.
Taxes and subsidies
- An indirect tax raises price and reduces quantity, cutting both consumer and producer surplus and creating a welfare loss (deadweight loss).
- A subsidy lowers price and raises quantity, increasing surplus but at a cost to the government.
Worked example
A subsidy on public transport shifts supply right, lowering fares. Consumer surplus rises (passengers pay less) and quantity increases. Producer surplus may also rise, but the government bears the subsidy cost — a transfer that must be judged against the positive externalities the subsidy targets.
Common exam mistakes
- Mislabelling the surplus areas on a diagram.
- Forgetting that a tax creates a welfare (deadweight) loss.
- Confusing a transfer (tax revenue/subsidy cost) with a welfare loss.
Exam technique
Shade surplus areas accurately, and show how taxes, subsidies and shifts change consumer surplus, producer surplus and welfare.
Quick revision
- Consumer surplus: below demand, above price. Producer surplus: above supply, below price.
- Tax → smaller surplus + welfare loss; subsidy → larger surplus + government cost.