Today's Question
Consumer surplus is the difference between what you're WILLING to pay and what you ACTUALLY pay. If you'd pay up to $50 for concert tickets but buy them for $30, your consumer surplus is $20. Why does consumer surplus represent 'value created' in the economy? What happens to consumer surplus when prices rise?
Model Answer
Value created: The $20 surplus means you got something worth $50 to you for only $30 - you captured $20 in 'value' that didn't exist before the trade. This is real economic welfare! When prices rise: Consumer surplus shrinks because the gap between willingness-to-pay and actual price narrows. At $45 tickets, your surplus is only $5. At $50, it's zero - you're indifferent about attending. Price increases transfer surplus from consumers to producers.