This slide describes about consumer and producer surplus and math related to both surplus.It also gives idea about market equilibrium

1. Consumer surplus & producer
surplus

2. • Consumer surplus (CS) is the difference
between willingness to pay (WP) for a good or
service and the price actually paid (AP) by the
consumer.
• WP is the maximum price at which a
consumer would buy a good or service.

3. WP and CS
• CS when the price of a used textbook is $30
• ------------------------------------------------------------
• Potential buyer WP AP ICS = WP-AP
• A $59 $30 $29=59-30
• B 45 30 15= 45-30
• C 35 30 5= 35-30
• D 25 - -
• E 10 - -
• -------------------------------------------------------------
• All buyers TCS=$49

4. ICS and TCS
• The net gain that a buyer achieves from the
purchase of a good is called that buyer’s ICS.
• It is equal to the difference between buyer’s
WP and AP.
• The sum of ICS achieved by all the buyers of a
good is known as TCS achieved in the market.
• Graphically TCS is equal to the area below the
demand curve but above the actual ptice.

5. How Changing Prices Affect CS.
• An increase in price decreases CS and a decrease
in price increases CS.
• Potential buyer WP AP ICS
• A $59 $20 $39
• B 45 20 25
• C 35 20 15
• D 25 20 5
• E 10 20 -
• All buyers TCS= $84
• Change in TCS=$84-$49=$35

6. CS and the demand curve
Actual price
$30
$20
D
D

7. • PS when the price of a used book is $30
• ------------------------------------------------------------
• Potential seller PR cost IPS= PR-AP
• A $30 $5 $25=$30-$5
• B $30 $15 $15=$30-$15
• C $30 $25 $5=$30-$25
• D - $35 ---
• E - $45 ----
• --------------------------------------------------------------
• All sellers total producer surplus=$45

8. Producer Surplus
• PS is the difference between the price actually
received by the seller for a good or service
and seller’s cost.
• Seller’s cost is the lowest price at which a
potential seller is willing to sell a good or
service.

9. IPS and TPS defined
• IPS is the net gain to an individual seller from
selling a good. It is the difference between the
price received and seller’s cost.
• TPS in a market is the sum of IPS of all sellers
of a good in a market.

10. How changing prices affect PS.
• An increase in price increases PS and a decrease in
price decreases PS.
• Potential sellers cost PR IPS=PR-cost
• A $5 $20 $20-$5=$15
• B 15 20 20-15=5
• C 25 - -
• D 35 - -
• E 45 - -
• --------------------------------------------------------------
• All sellers Total producer surplus=$20
• Change in TPS=$45-$20=$25

11. Producer surplus and the supply curve.
$30
$20
price
Quantity supplied
S
S
A B
C
D
E