Download CONSUMER/PRODUCER SURPLUS

CONSUMER/PRODUCER
SURPLUS
INTRO.
► In
a perfectly competitive market, the
equilibrium price and qty. are determined by
the intersection of the supply and demand
functions.
► Each of the units of equil. qty. are sold by
sellers to consumers at the equil. Price.
CONSUMER SURPLUS
► Difference
between price consumers are willing to
pay and the price they do pay for a unit of a good.
► Demand curve shows the highest price consumers
are willing to pay for different amounts of the
good.
► On the graph, consumers are willing to pay a price
of $35 for 10 units, $30 for 20 units, and only $25
for 30 units.
► Since consumers receive less extra satisfaction
with additional units of a good, they would only be
willing to buy more if the price is reduced.
CONSUMER SURPLUS (CONT’D)
► At
the equilibrium quantity of 20 units, total
consumer surplus is the area of AEC.
► Find the total dollar value of this area by
using the formula for the area of a triangle
(1/2 x base x height)
► This amount represents the amount
consumers were willing to spend on 20 units
above the amount they had to spend.
PRODUCER SURPLUS
► Difference
between the price sellers receive
for a unit of a good and the price they are
willing to accept.
► The supply curve shows the lowest price
sellers are willing to accept for different
amounts of the good.
► In the graph, we see sellers must receive a
price of $20 for 10 units, $30 for 20 units,
and $40 for 30 units.
PRODUCER SURPLUS (CONT’D)
► Since
additional units of a good create
higher marginal costs of production to
sellers, they would only be willing to put
more of the good on the market if the price
were increased.
► Total producer surplus is the area BEC.
► This amount represents the amount sellers
received above the minimum amount they
would have accepted for 20 units.