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CONSUMER/PRODUCER SURPLUS INTRO. ► In a perfectly competitive market, the equilibrium price and qty. are determined by the intersection of the supply and demand functions. ► Each of the units of equil. qty. are sold by sellers to consumers at the equil. Price. CONSUMER SURPLUS ► Difference between price consumers are willing to pay and the price they do pay for a unit of a good. ► Demand curve shows the highest price consumers are willing to pay for different amounts of the good. ► On the graph, consumers are willing to pay a price of $35 for 10 units, $30 for 20 units, and only $25 for 30 units. ► Since consumers receive less extra satisfaction with additional units of a good, they would only be willing to buy more if the price is reduced. CONSUMER SURPLUS (CONT’D) ► At the equilibrium quantity of 20 units, total consumer surplus is the area of AEC. ► Find the total dollar value of this area by using the formula for the area of a triangle (1/2 x base x height) ► This amount represents the amount consumers were willing to spend on 20 units above the amount they had to spend. PRODUCER SURPLUS ► Difference between the price sellers receive for a unit of a good and the price they are willing to accept. ► The supply curve shows the lowest price sellers are willing to accept for different amounts of the good. ► In the graph, we see sellers must receive a price of $20 for 10 units, $30 for 20 units, and $40 for 30 units. PRODUCER SURPLUS (CONT’D) ► Since additional units of a good create higher marginal costs of production to sellers, they would only be willing to put more of the good on the market if the price were increased. ► Total producer surplus is the area BEC. ► This amount represents the amount sellers received above the minimum amount they would have accepted for 20 units.