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Welfare Economics

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Producer and Consumer Surplus

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Welfare Economics

1. 1. Welfare Economics <br />Consumer and Producer Surplus<br />
2. 2. Consumer Surplus <br />How much are you willing to pay for a pair of jeans?<br />As an individual consumer, you have no say in determining the market price; you take the market price as given.<br />If the market price is at or below what you are willing to pay for a good, you buy it.<br />If the market price is below what you are willing to pay for a pair of (your favorite) jeans, your purchase will result in consumer surplus: the difference between the price that you were willing to pay and the (market) price you actually paid.<br />
3. 3. Consumer Surplus<br />Individual consumer surplus = net gain from the purchase of a good= the difference between the maximum price a consumer is willing to pay for a good and the actual price paid<br />Total consumer surplus is the sum of all consumer surpluses gained by all buyers of a good in the market<br />
4. 4. Consumer Surplus and the Market Demand <br />\$P<br /> Total consumer surplus <br />= Σ ( Max Price – Market Price)<br />= 105 <br />55<br />50<br />45<br />40<br />35<br />30<br />25<br />Price = \$25 <br />20<br />15<br />10<br />5<br />D<br />Q<br />0 1 2 3 4 5 6 7 8 9 10 11<br />
5. 5. Consumer surplus = the area above the price and below the demand curve<br />100<br />Consumer surplus = {400(100-35)}/2<br /> = 13000<br />Consumer Surplus <br /> P = 35<br />35<br />D<br />0<br />400<br />
6. 6. Consumer Surplus and A Price Increase <br />100<br />Consumer surplus = {270(100-60)}/2<br /> = 5400<br />Consumer <br />Surplus <br />60<br /> P = 60<br />35<br />D<br />0<br />400<br />270<br />
7. 7. Producer Surplus <br />The seller’s cost: the lowest price a seller is willing to accept for a good: (marginal cost of production)<br />Producer surplus: the difference between the (market) price a seller actually receives and his/her (seller’s) cost<br />A seller would not sell below his/her cost<br />If the market price is below a seller’s cost the seller will leave the market <br />
8. 8. Producer Surplus and The Market Supply<br />P<br />Producer surplus = 6750<br />S<br />P = 60<br />60<br />Producer <br />Surplus <br />10<br />0<br />270<br />
9. 9. Total Surplus <br />S<br />100<br />Consumer <br />Surplus<br />60<br />Producer <br />Surplus <br />10<br />D<br />270<br />0<br />