Download Total consumer surplus

Microeconomics in Modules
and
Economics in Modules
Third Edition
Krugman/Wells
Module 11
Consumer and
Producer Surplus
What You Will Learn
1
The meaning of consumer surplus and its
relationship to the demand curve
2
The meaning of producer surplus and its
relationship to the supply curve.
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Consumer Surplus and
the Demand Curve
• A consumer’s willingness to pay for a good is the
maximum price at which he or she would buy that good.
• Individual consumer surplus is the net gain to an
individual buyer from the purchase of a good. It is equal
to the difference between the buyer’s willingness to pay
and the price paid.
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The Demand Curve for Used Textbooks
Price of
book
Aleisha
$59
Brad
45
Claudia
35
Willingness
to pay
Aleisha
Brad
$59
Claudia
35
Darren
Edwina
25
45
10
Darren
25
Edwina
10
D
0
Potential
buyers
1
2
3
4
5
Quantity of books
A consumer’s willingness to
pay for a good is the
maximum price at which he
or she would buy that good.
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Willingness to Pay
and Consumer Surplus
• Total consumer surplus is the sum of the individual
consumer surpluses of all the buyers of a good.
• The term consumer surplus may refer to either
individual or total consumer surplus.
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Consumer Surplus in the Used
Textbook Market
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Consumer Surplus in the Used
Textbook Market
Price of
book
Aleisha’s consumer surplus:
$59 – $30 = $29
$59
Aleisha
45
Brad’s consumer surplus:
$45 – $30 = $15
Brad
Claudia’s consumer
surplus: $35 – $30 = $5
35
Claudia
30
Price = $30
25
Darren
10
The total consumer surplus
given by the entire shaded
area—the sum of the
individual consumer
surpluses of Aleisha, Brad,
and Claudia—is equal to
$29 + $15 + $5 = $49.
Edwina
D
0
1
2
3
4
5
Quantity of books
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Consumer Surplus
Price of
iPad
The total consumer surplus
generated by purchases of a
good at a given price is equal to
the area below the demand
curve but above that price.
Consumer
surplus
Price = $500
$500
D
0
1 million
Quantity of iPads
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How Changing Prices Affect Consumer
Surplus
• A fall in the price of a good increases consumer surplus
through two channels:
– It provides a gain to consumers who would have bought at
the original price.
– It provides a gain to consumers who are persuaded to buy
by the lower price.
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Consumer Surplus and a Fall in the
Price of Used Textbooks
Price of
book
Increase in Aleisha’s
consumer surplus
$59
Aleisha
Increase in Brad’s
consumer surplus
45
Brad
Increase in Claude’s
consumer surplus
Claudia
35
30
Original price = $30
Darren
25
20
New price = $20
10
Darren’s consumer
surplus
Edwina
D
0
1
2
3
4
5
Quantity of books
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A Fall in the Market Price Increases
Consumer Surplus
Price of iPad
Increase in consumer
surplus to original buyers
$2,000
Consumer surplus
gained by new
buyers
500
D
0
200,000
1 million
Quantity of iPads
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Economics in Action
A Matter of Life and Death
• Each year, about 4,000 people in the United States die
while waiting for a kidney transplant.
• The United Network for Organ Sharing is devising a
new set of guidelines whereby kidneys would be
allocated on the basis of greatest net benefit, where net
benefit is measured as the increase in lifespan from the
transplant.
• This would increase recipients’ extra years by 11,000.
• The “net benefit” concept is like consumer surplus: the
individual consumer surplus generated from getting a
new kidney.
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Producer Surplus
and the Supply Curve
• A potential seller’s cost is the lowest price at which he or
she is willing to sell a good.
• Individual producer surplus is the net gain to a seller
from a sale. It is equal to the difference between the price
received and the seller’s cost.
• Total producer surplus in a market is the sum of the
individual producer surpluses of all sellers of a good.
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The Supply Curve for Used Textbooks
Price of
book
Potential
sellers
S
$45
Engelbert
Engelbert
Donna
25
Carlos
15
Betty
Andrew
45
Betty
Andrew
5
0
$ 5
15
25
35
Carlos
Donna
35
Cost
1
2
3
4
5
Quantity of books
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Producer Surplus When the Price of a
Used Textbook is $30
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Producer Surplus in the Used Textbook
Market
Price of book
S
$45
Engelbert
35
Donna
Price = $30
Carlos’s
producer
surplus
Betty’s
producer
Andrew’s
surplus
producer
surplus
30
25
Carlos
Betty
15
5
0
Andrew
1
2
3
4
5
Quantity of books
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Producer Surplus
Price of wheat (per bushel)
S
$5
The total producer
surplus from sales of a
good at a given price is
the area above the
supply curve but below
that price.
Price = $5
Producer
surplus
0
1 million
Quantity of wheat (bushels)
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How Changing Prices Affect Producer
Surplus
• When the price of a good rises, producer surplus increases
through two channels:
– the gains of those who would have supplied the good even
at the original lower price
– the gains of those who are induced to supply the good by
the higher price
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A Rise in the Price Increases Producer
Surplus
Price of wheat (per
bushel)
Increase in producer
surplus to original
sellers
Producer
surplus gained
by new sellers
S
$7
5
0
1 million
1.5 million
Quantity of wheat (bushels)
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Summary
1. The willingness to pay of each individual
consumer determines the demand curve.
2. The difference between willingness to pay and
price is the net gain to the consumer, the
individual consumer surplus.
3. Total consumer surplus in a market is the sum of
all individual consumer surpluses in that market.
4. A rise in the price of a good reduces consumer
surplus; a fall in the price increases consumer
surplus.
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Summary
5. The cost of each potential producer, the lowest
price at which he or she is willing to supply a unit
of that good, determines the supply curve. If the
price of a good is above a producer’s cost, a sale
generates a net gain to the producer, known as the
individual producer surplus.
6. Total producer surplus, the sum of the individual
producer surpluses in a market, is equal to the area
above the market supply curve but below the price.
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