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IAI Actuarial Core Principles · Business Economics · Consumer demand and behaviour

In a demand and supply diagram for a good, consumer surplus is best defined as:

Consumer surplus is the excess of the maximum price consumers are willing to pay over the price they actually pay, summed across all units bought. It is the area below the demand curve and above the market price, measuring the benefit consumers gain from trading.

  1. AThe difference between the price consumers are willing to pay and the price they actually pay, summed over units boughtCorrect
  2. BThe difference between the market price and the producers' marginal cost
  3. CThe total amount spent by consumers on the good
  4. DThe extra utility from consuming one additional unit
  5. The area under the supply curve up to the equilibrium quantity

Explanation

Consumer surplus is the gap between what consumers would be willing to pay and what they actually pay, added over all units purchased. Producer surplus involves marginal cost, and total expenditure is price times quantity.

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