Consumer producer surplus

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Consumer producer surplus

  1. 1. Consumer and Producer Surplus<br />Efficiency and <br />Deadweight Loss<br />
  2. 2. 2<br />Consumer Surplus<br />The difference between the maximum price consumers are willing to pay for a product and the actual price.<br />The surplus, measurable in dollar terms, reflects the extra utility gained from paying a lower price than what is required to obtain the good. <br />Consumer surplus can be measured by calculating the difference between the maximum willingness to pay and the actual price for each consumer, and then summing those differences.<br />Or consumer surplus is shown graphically as the area under the demand curve and above the equilibrium price. <br />Consumer surplus and price are inversely related – all else equal, a higher price reduces consumer surplus.<br />
  3. 3. 3<br />Consumer Surplus<br />The difference between the maximum price consumers are willing to pay for a product and the actual price.<br />The surplus, measurable in dollar terms, reflects the extra utility gained from paying a lower price than what is required to obtain the good. <br />Consumer surplus can be measured by calculating the difference between the maximum willingness to pay and the actual price for each consumer, and then summing those differences.<br />Or consumer surplus is shown graphically as the area under the demand curve and above the equilibrium price. <br />Consumer surplus and price are inversely related – all else equal, a higher price reduces consumer surplus.<br />In a competitive market, the actual price will be the equilibrium or market price.<br />The maximum willingness to pay is the consumer’s marginal benefit for the good measurable in dollar terms.<br />
  4. 4. 4<br />Consumer Surplus<br />P<br />S<br />Consumer Surplus is <br />the area under the demand<br />curve and above the market<br />price.<br />Market Price<br />D<br />Q<br />
  5. 5. 5<br />Producer Surplus<br />The difference between the actual price producers receive and the minimum acceptable price.<br />Producer surplus can be measured by calculating the difference between the minimum acceptable price and the actual price for each unit sold, and then summing those differences.<br />Producer surplus is shown graphically as the area above the supply curve and below the equilibrium price.<br />Producer surplus and price are directly related – all else equal, a higher price increases producer surplus.<br />
  6. 6. 6<br />Producer Surplus<br />P<br />S<br />Producer surplus is<br />the area under the market<br />price and above the price <br />necessary for supply.<br />Market Price<br />D<br />Q<br />
  7. 7. 7<br />Efficiency<br />Markets are allocatively efficient (i.e., the allocation of resources to the quantity most desired) when consumer and producer surplus are at a maximum.<br />Consumers receive utility up to their maximum willingness to pay, but only have to pay the equilibrium price. <br />Producers receive the equilibrium price for each unit, but it only costs the minimum acceptable price to produce.<br />Allocative efficiency occurs at quantity levels where three conditions exist:<br />MB = MC<br />Maximum willingness to pay = minimum acceptable price.<br />Combined consumer and producer surplus is at a maximum.<br />
  8. 8. 8<br />Maximum benefit to society occurs when price and quantity are at the equilibrium point.<br />P<br />S<br />Consumer surplus and <br />Producer surplus are<br />maximized.<br />Market Price<br />D<br />Q<br />Equilibrium quantity<br />
  9. 9. 9<br />Inefficiency or Deadweight Loss<br />Underproduction reduces both consumer and producer surplus, and efficiency is lost because both buyers and sellers would be willing to exchange a higher quantity.<br />Overproduction causes inefficiency because past the equilibrium quantity, it costs society more to produce the good than it is worth to the consumer in terms of willingness to pay.<br />A deadweight loss occurs when the combined consumer and producer surplus is not maximized. This occurs when something such as a price control causes either over-production or under-production of a good or service.<br />
  10. 10. 10<br />An imperfect competitor produces at a price higher and at a quantity less than pure competition causing a loss of efficiency.<br />P<br />Surplus is not<br />Maximized:<br />Loss of efficiency<br />MC<br />Consumer<br />surplus<br />Producer<br />surplus<br />D<br />Q<br />MR<br />
  11. 11. 11<br />Remember:<br />Consumer surplus is the difference between the maximum price consumers are willing to pay for a product and the actual price.<br />Producer surplus is the difference between the actual price producers receive and the minimum acceptable price.<br />Markets are efficient when the consumer and producer surpluses are at a maximum.<br />A deadweight loss occurs whenever there is over-production or under-production of a good or service.<br />

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