Download Consumer and Producer Surplus

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Consumer and Producer
Surplus
Copyright 2006 – Biz/ed
http://www.bized.co.uk
Joint Supply
• Where an increase/decrease
in supply of one good leads to
an increase/decrease in supply
of another
• Beef/hides, Lamb/wool, oil/fuels,
milk/dairy products, cocoa/husks,
etc.
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Joint Supply
S Oil
Price
S Petrol
Price
S1
15
Surplus
6
10
D1
5
D
D
100
150
Quantity bought and sold
80
95
120
Quantity bought and sold
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Composite Demand
• Where goods have more than one use –
an increase in the demand for one leads
to a fall in supply of the other
• Milk – used for cheese, yoghurts,
cream, butter, etc.
• If more milk is used for cheese, ceteris
paribus there is less available
for butter
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Composite Demand
S1
S Milk
Price
Price
20
9
10
6
S Cheese
Shortage
D1
D
100
130
Quantity bought and sold
D
20
50
80
Quantity bought and sold
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Derived Demand
• Where the demand for one good is
dependent on the demand for
another related good
• Construction industry – demand for new
office construction – demand for office
space
• Demand for construction workers –
demand for construction work
• Factor markets – derived demand
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Derived Demand
Price
(000s)
S Houses
S Plasterers
Wage Rate
(£ per hour)
20
200
12
180
Shortage
D1
D1
D
100
130
Quantity bought and sold
D
80 90
120
Quantity hired
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Consumer Surplus
• The difference between the price
that a 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
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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
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Producer Surplus
• Difference between the market
price received by the seller and
the price they would have been
prepared to supply at
• Price received – linked to factor
cost + element of normal profit
• Producer surplus = abnormal profit
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Price (£)
Producer Surplus
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
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