Download Consumer and Producer Surplus

Consumer and Producer Surplus
Consumer Surplus Activity
 Name Five CDs as a class
 Complete activities 1 and 2 individually
Consumer Surplus
 The difference between the price that a
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consumer is prepared to pay and the actual
price paid
Related to the value we place on items
Linked to the degree of utility
Useful concept in analysing welfare gains
and losses as a result of resource allocation
Emphasis on the MARKET demand – of those in
the market there are some who are willing to pay
higher prices than the market price
Consumer Surplus
Price (£)
Market Price = £5
20 consumers willing to pay £5
15 Consumers WILLING to pay £9
These 15 consumers get 15 x £4
of consumer surplus
9
Total utility = value represented by
blue and gold area
5
Blue area is amount paid to
acquire good. Gold area = total
consumer surplus
D = Marginal Utility
15
20
Quantity Demanded
Producer Surplus
 Difference between the market price
received by the seller and the price they
would have been prepared to supply at
Producer Surplus
Price (£)
S
Market price = £10
At £10, suppliers willing to offer
60 for sale
10
Total Revenue = blue area
£10 x 60 = £600
Some suppliers would have offered
35 for sale at £6:
Producer surplus = 35 x £4 = £140
6
Gold area = Producer surplus
35
60
Quantity Supplied
Consumer & Producer Surplus
Community Surplus
 The welfare of society made up of consumer
surplus and producer surplus together.
 The free market maximises community surplus
and is therefore seen to be desirable and
provides the optimal allocation of resources