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IAI Actuarial Core Principles · Business Economics · How competitive markets operate

In a perfectly competitive market with a downward-sloping demand curve and an upward-sloping supply curve, consumer surplus at the equilibrium price is best defined as:

Consumer surplus is the gap between what consumers are willing to pay for each unit and the price they actually pay, added up over all units bought. It is the buyers' net gain from trade, shown as the area under demand and above price.

  1. AThe difference between the maximum price consumers are willing to pay and the price they actually pay, summed over units boughtCorrect
  2. BThe total revenue received by producers minus their total variable costs
  3. CThe difference between the equilibrium price and the minimum price at which producers would supply, summed over units sold
  4. DThe total amount consumers spend on the good at the equilibrium price
  5. The area between the supply curve and the demand curve beyond the equilibrium quantity

Explanation

Consumer surplus measures the gain to buyers: willingness to pay minus price paid, summed over all units purchased. Option C describes producer surplus, and B is also a producer-side measure. Total expenditure (D) is price times quantity and ignores willingness to pay.

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