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Consumer and Producer Surplus Consumer and producer surplus are important concepts to use when discussing economic welfare. This presentation looks at each concept and their application to market conditions Consumer and Producer Surplus Demand and Consumer Surplus Assume the current market price is £3 per pizza – the consumer is prepared to buy 15 slices of pizza per week at this price Price per Pizza (£) £3 Market Price Demand 15th Consumer and Producer Surplus Quantity of Pizzas Demanded (Qd) Demand and Consumer Surplus Consumer would be willing to pay £6 for 5 slices of pizza – in fact the consumer only has to pay £3 for this pizza Price per Pizza (£) £6 £3 Market Price Demand 5th Consumer and Producer Surplus 15th Quantity of Pizzas Demanded (Qd) Demand and Consumer Surplus Consumer surplus is the difference between what the consumer is willing to pay and the price they actually do pay Price per Pizza (£) £6 £3 Market Price Demand 5th Consumer and Producer Surplus 15th Quantity of Pizzas Demanded (Qd) Demand and Consumer Surplus Price per Pizza (£) £6 £4.50 £3 Market Price Demand 5th Consumer and Producer Surplus 10th 15th Quantity of Pizzas Demanded (Qd) Total Expenditure and Consumer Surplus Total Spending = price per unit X Quantity consumed Price per Pizza (£) £6 £4.50 £3 Market Price Demand 5th Consumer and Producer Surplus 10th 15th Quantity of Pizzas Demanded (Qd) Consumer Surplus at the Equilibrium Price Price per Unit (£) Market Supply £20 Total willingness to pay - actual amount paid Market Demand 100 Consumer and Producer Surplus Quantity Consumer Surplus and Price Elasticity of Demand Inelastic demand, consumers are insensitive to price Price per Unit (£) Market Supply £20 Market Demand 100 Consumer and Producer Surplus Quantity An Inelastic Demand – High Level of Consumer Surplus Price per Unit (£) Market Supply £20 Market Demand 100 Consumer and Producer Surplus Quantity Elastic Demand – a Lower Willingness to Pay Price per Unit (£) Elastic demand – low level of consumer surplus Market Supply £18 Market Demand 100 Consumer and Producer Surplus Quantity Consumer Surplus Consumer surplus Is the difference between what consumers are willing to pay and what they actually have to pay at market prices Represents the benefit to consumers of monetary exchange of goods and services Area of consumer surplus is shown by area above the market price and below the demand curve Consumers receive “surplus” when the marginal benefit of another unit of the good exceeds the price paid When demand is inelastic – producers may try to exploit consumer surplus by raising price and turning this into extra revenue Consumer and Producer Surplus Producer Surplus Producer Surplus is the difference between what producers are willing to accept to produce a good and the price they actually receive in the market Producer surplus shown by the area above the market supply curve and below the market price Producer surplus is included when we measure economic welfare Consumer and Producer Surplus Showing Producer Surplus Price per Unit (£) Price is £20 – but firms would be willing to supply some units at a lower price Market Supply £20 Market Demand 100 Consumer and Producer Surplus Quantity Total Revenue (TR) = Price (P) x Quantity Supplied (Q) Price per Unit (£) Total revenue = £2000 Market Supply £20 Market Demand 100 Consumer and Producer Surplus Quantity Producer Surplus Price per Unit (£) Producer Surplus Market Supply £20 Market Demand 100 Consumer and Producer Surplus Quantity Total Economic Welfare (Consumer + Producer Surplus) Price per Unit (£) Consumer Surplus Market Supply £20 Producer Surplus Market Demand 100 Consumer and Producer Surplus Quantity
