3. Consumer surplus:
measures the dollar benefit consumers receive from
buying goods or services in a particular market
Marginal benefit is the additional benefit to a
consumer from consuming one more unit of a good
or service
It is the difference between the highest price a
consumer is willing to pay and the price the consumer
actually pays
Consumer surplus is the area below the demand
curve and above the market price
In a market, it is equal to total benefits received by
the consumers minus the total amount the must pay
to buy the good.
4. Demand curve/marginal benefit curve
Marginal benefit from
consuming the 4th cup is 3
3.0
2.0
4 5
Marginal benefit from
consuming the 5th cup is 2
Quantity
Quantity
Price per cup
6. Producer surplus:
measures the dollar benefit firms receive from
selling goods or services in a particular market
Marginal cost is the additional benefit to a firm of
producing one more unit of a good or service
It is the difference between the lowest price a
firm would have been willing to accept and the
price it actually receives
Producer surplus is the area below the market
price and above the supply curve
It is equal to the total amount firms receive from
the consumers minus the cost of producing the
goods
7. Supply curve/marginal cost curve
Marginal cost of producing
the 50th cup is 2
2.0
40 50
Marginal benefit from
producing the 40th cup is 1.80
Quantity
Quantity
Price per cup
1.80
9. Economic Surplus
Economic surplus = Consumer surplus+ producer
surplus
Note: when a government imposes a price
ceiling or a price floor, the amount of economic
surplus in a market is reduced
10. Effect o government interventions in
markets can be analyzed using the
concepts of consumer surplus, producer
surplus, and economic surplus.
12. 2.00
15,000
High output market
Quantity
Price per cup
Low output market
14,000 16,000
2.20
1.80
13. Deadweight loss
The reduction in economic surplus resulting from
a market not being in competitive equilibrium is
called the deadweight loss.
14. Economic Efficiency
Is a market outcome in which the
marginal benefit to consumers of the last
units produced is equal to its marginal
cost of production, and in which the sum
of consumer surplus and producer surplus
is at a maximum
This does not mean that every individual is
better off if a market is at its competitive
equilibrium
15. Producers or consumers who are
dissatisfied with equilibrium price can
pressurize government to change the
price
Price floor and Price Ceiling
16. Price Ceiling vs Price Floor
Price ceiling: Government imposed, legally
determined maximum price that seller may
charge
Price floor: Government imposed, legally
determined minimum price that sellers may
receive
18. The results of government interventions:
winners, losers, and inefficiency
Some people win
Some people lose
There is loss of economic efficiency
19. Effect of taxes on Economic Efficiency
Whenever a government taxes a good or
service, less of that good or service will be
produced
