Download Lesson 7 - Consumer and Producer Surplus

Consumer and Producer Surplus
Lesson 7
Sections 49, 50, 51
Consumer Surplus and the Demand
Curve
• Willingness to Pay
– The demand curve is based on the individual choices of the people
that make it up, and each individual is willing to pay a different price.
– While Consumer A might be willing to pay $500 for a new television,
Consumer B might only pay $300.
– If the Television costs $250, both will buy the television, but each will
have a different level of benefit, called surplus. B would have a surplus
of $50, while A would have a surplus of $250.
Figure 49.1 The Demand Curve for Used Textbooks
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Figure 49.2 Consumer Surplus in the Used-Textbook Market
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Figure 49.3 Consumer Surplus
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Figure 49.6 The Supply Curve for Used Textbooks
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Figure 49.7 Producer Surplus in the Used-Textbook Market
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Figure 49.8 Producer Surplus
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Consumer Surplus, Producer Surplus
and Efficiency
• The Gains from Trade
– Both the buyer and the seller expect to gain from a trade, otherwise the trade
would not happen.
– The gains from trade are the consumer and producer surplus added together.
• The Efficiency of Markets
– The idea of the efficiency of markets is that no other combination of price and
quantity will produce more consumer or producer surplus.
– In other words, the market is efficient if there is no way to make someone
better off without making someone else worse off.
Equity and Efficiency
• Efficiency is not the only goal however, as society is also concerned
with equity, or fairness.
– Progressive Tax
– Regressive Tax
– Flat Tax
The Effects of Taxes on Total Surplus
• The Effect of an Excise Tax on Quantity and
Price
Price Elasticities and Tax Incidence
The Benefits and Costs of Taxation
• Revenue from an Excise Tax
– The revenue of the tax is the value of the tax times the
quantity
• Costs of Taxation
– Deadweight Loss
• Transactions that do not take place
– Administrative Costs
• Additional costs of having the tax
– Opportunity Costs
• Home improvements not made because of increasing tax
burden
Utility as Satisfaction
• Utility and Consumption
– Utility is an imaginary measure of satisfaction.
• Principle of Diminishing Marginal Utility
– Marginal Utility
• What is the satisfaction of consuming the next item?
– Marginal Utility Curve
Figure 51.1 Cassie’s Total Utility and Marginal Utility
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Budgets and Optimal Consumption
• Budget Constraints and Budget Lines
– Budget Constraint
– Consumption Possibilities
– Budget Line
• The Optimal Consumption Bundle
Figure 51.3 Optimal Consumption Bundle
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers