4.1.5.11 Consumer and Producer Surplus

Course Objectives

Able to apply the concepts when discussing economic efficiency and welfare issues ie. Price Discrimination and Dead-weight loss associated with monopoly Diagrammatic analysis is expected

Community Surplus

Commuity Surplus is both, it represents the total benefit to society, this is maximised at the point where Qd=Qs (equilibrium). this means at the market equilibrium resources are allocated effciently

Producer and Consumer Surplus: Explanation of Extra Benefit

Consumer surplus is area A, the area below the demand curve but above equilibrium price. this is the additional benefit (or utility) received by a consumer for paying a price thats lower than their willing to pay Producer Surplus is area B, area above the supply curve and below equilibrium price, this is the additional benefit (or utility) gained by the producer for receving a price which is greater than the price they would be willing to supply for the good

Application to Price Discrimination

Consumer surplus measures consumer welfare, and produce theirs by charging different prices to each of the market segments there is a transfer from the consumer to the producer producer welfare has increased at the expense of consumer welfare who are now worse off (this diagram only shows 1 market, show all 3)

Application to Monopoly

In a Monopoly where the firm is a price maker/quantity setter and can charge the high price of P1 and lower output of Q1 Consumer surplus under monopoly is FP1A, Producer Surplus is P1AEC their is an overall (net) loss of economic welfare ABC. this represents a dead weight loss of monopoly, AJB is lost for consumers, JBC for producer

Application to Perfect Competition

Price is P and output Q, determined collectively by buyers and sellers Consumer Surplus is area FPB and producer surplus and producer surplus of area PBE area of economic welfare is FBE

Producer Surplus

a measure of the welfare Producers gain from producing a good or service This is the difference between the price a Producer is willing to supply at (supply/MC curve) and they price they actually receive (market price) Producer surplus is the area above the supply curve and below the market price

Consumer Surplus

a measure of the welfare consumers gain from consuming a good or service This is the difference between the price a consumer is willing to pay (demand curve) and the price they actually pay (market price) Consumer Surplus is the area under the demand curve and above market clearing price

however

if the monopoly was regulated and insisted they operated at allocatively effcienct level then the effcient level fo output and price is forced, maximising economic welfare