Consumer and Producer Surplus
Consumer and Producer Surplus
Consumer and Producer Surplus
CHAPT
ER
Consumer and
Producer Surplus
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CONSUMER SURPLUS
Consumer surplus: the difference
between market price and what
consumers (as individuals or the
market in total) would be willing to
pay.
Key intuition: The demand
curve for a good or service
can be thought of as
measuring consumers
willingness to pay for a
marginal unit of the good or
service.
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Price of
book
Aleisha
$59
Potential
buyers
Demand
Curve
Brad
45
Claudia
35
Willingne
ss to pay
Aleisha
Brad
$59
Claudia
35
Darren
Edwina
25
45
10
Darren
25
Edwina
10
D
0
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CONSUMER SURPLUS
Price of
book
$59
Aleisha
45
Brad
35
Claudia
30
Price = $30
25
Darren
10
Edwina
D
0
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CONSUMER SURPLUS
Price of
book
35
Each individuals
Aleishas consumer
surplus:
consumer surplus is the
$59 $30 = $29
difference between what
Aleisha
they would be willing to pay
Brads consumer
and the market price.
surplus:
$45 $30 = $15
Brad
Claudias consumer
surplus: $35 $30 =
$5
Claudia
30
Price = $30
$59
45
25
Darren
10
Edwina
D
0
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CONSUMER SURPLUS
Price of
widgets
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CONSUMER SURPLUS
Consumer surplus is the area beneath the demand curve and above
the price.
Price of
Area of triangle
widgets
Height
80
Total consumer
surplus at a price of
$20
20
(base x height)
Base
(80 20) 90 =
$2,700
D
Quantity of widgetsBack to
90
C
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$59
45
Increase in Claudias
consumer surplus
Claudia
35
30
25
20
10
Darrens
consumer
surplus
Edwina
D
0
C
1
Y
2
G
3
2
4
0
5
W
Quantity of books
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Increase in
consumer surplus to
original buyers
$5,000
Consumer
surplus gained
by new buyers
1,500
D
0
200,000
1 millionQuantity of computers
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PRODUCER SURPLUS
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PRODUCER SURPLUS
Key intuition: What is the lowest payment a
seller would be willing to accept for a given
product? It depends on the seller and the
good/service being sold.
For an individual, its the opportunity cost of
selling the marginal unit of the good or
service.
For a firm, its the cost of producing the
marginal unit of the good or service.
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Potential
sellers
$45
Engelbert
Donna
35
25
Carlos
15
Andrew
Andrew
$5
Donna
15
Carlos
25
Betty
Engelbert
35
45
Betty
Cost
Quantity of books
1
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PRODUCER SURPLUS
Price of
book
$45
Engelbert
35
Donna
25
Carlos
Betty
15
5
Andrew
Price = $30
Carloss
producer
surplus
Bettys
producer
Andrews surplus
producer
surplus
30
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PRODUCER SURPLUS
Price of
book
$45
Engelbert
35
Donna
Price = $30
Carloss producer surplus:
$30 - $25 = $5
30
25
Carlos
5
0
Bettys producer
surplus: $30 - $15 =
$15
Andrews producer surplus:
$30 - $5 = $25
Betty
15
Andrew
1
Total producer
surplus is the
entire shaded area
the sum of the
individual producer
surpluses of
Andrew, Betty, and
Carlos ($25 + $15
+ $5 = $45).
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Producer surplus
$10
n/a
Doras
Doras price
price =
= $10
$10
Lees price = $8
Lees price = $8
Sams price = $6
Sams price = $6
Kathys price = $4
Kathys price = $4
$10
$10
$10
$10
$10
$10
$10
$10
$0
$2
$4
$6
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PRODUCER SURPLUS
In the previous example, we had
a market with only 5 sellers, each
with an individual willingness to
accept, which gave us a steppedlooking
supply curve.
S
0
Quantity of wheat
(bushels)
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PRODUCER SURPLUS
The total producer
surplus from sales
of a good at a given
price is the area
above the supply
curve but below
that price.
$5
Price = $5
Producer
surplus
1 million
Quantity of wheat
(bushels)
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Producer surplus
gained by new
sellers
$7
1 million
1.5 million
Quantity of wheat (bushels)
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Equilibrium
price
Consumer
surplus
$30
Producer
surplus
D
0
1,000
Quantity of
books
Equilibrium quantity
C
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120
Quantity of
lobster
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Its
worth
$35
Loss in consumer
surplus if the
book is taken
from Ana and
given to Bob
Its
worth
$25
A
$35
E
30
B
25
1,000
Quantity of books
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Id sell it
for $25
minimum.
Id take
no less
than
$35.
$35
Loss in producer
surplus if Yvonne is
made to sell the book
instead of Xavier
30
X
25
1,000
Quantity of books
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$35
Y
Loss in total surplus if
the transaction between
Yvonne and Bob is forced
30
25
D
0
1,000
Quantity of books
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Equilibrium prices
signal to
resources exactly
where they are
most valued.
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