Consumer and Producer Surplus
What is a consumer's willingness to pay for a good?
A consumer's willingness to pay for a good is the maximum price at which he or she would buy that good.
how do i find the total surplus ?
Find the total consumer surplus of BOTH consumer and Producers by using the 1/2 bh formula. Then add the sum of each together
efficiency is important but...
society also care about equity
What is producer surplus?
the difference between market price and the price at which firms are willing to supply the product.
Profits decline in industries when
consumers want less of that industry's products
Example of total consumer surplus of a triangle
graph and price (height) are 20, and 80 graph quantity is 90 the total consumer surplus is $20 ½(80 - 20) × 90 = $2,700
Calculate the total producer surplus if the price of oil is $50 per barrel for quantity of 60. Starting point line is 5
1/2 b x h = Producer total surplus B= 60 H= 50, 5 ½(50 - 5) × 60 = $1,350
example practice ______________ What is the total surplus when the price is at equilibrium? equilibrium price is - $10, Q of 120 consumer - $22 producer - $ 4
1/2bh= Total surplus consumer- $22- $10 (equlibrium price) = 12 producer- $10 (equilibrium price) - $4 = 6 1/2 (120 * 18) = 1080
What are three way you might (unsuccessfully) try to increase the total surplus?
reallocate consumption among consumers reallocate sales among sellers change the quantity traded
Producer surplus rises if price increases
...
Why arent markets always efficient?
Because sometimes they fail. Opportunities are missed and some people could be made better off without making other people worse off.
Where is consumer surplus?
Consumer surplus is the area BENEATH the demand curve and ABOVE the price.
How do i tell which is consumer and which is producer?
Consumer will ALWAYS be above the equilibrum price Producers will be BELOW the equilibrium price
Why does good economic signals matter?
Equilibrium prices signal to resources exactly where they are most valued.
What is property rights and why is private property matter?
Private property rights create and protect incentives to trade with others—and to innovate.
What do societies sometimes choose to have the governemnt do?
Sometimes societies choose to have governments intervene in markets to increase efficiency (even though it reduces efficiency).
example how to calculate producer surplus
The Market price is = $10 Seller minimum price to sell for Lee = $8 Producer surplus will be = $2 The Market price is = $10 Seller minimum price to sell for Jane = $12 Producer surplus will be = nothing (n/a) If seller 1 price for a certain good is higher than the market price, and seller 2 price is $2 cheaper. Then the consumer would rather buy from seller 2, leaving that producer a surplus of $2.
What is consumer surplus?
The difference between market price and what consumer would be willing to pay.
What is the Total consumer surplus?
The total consumer surplus is the entire shaded area- the sum of the individual consumer surpluses.
What is the total producer surplus?
The total producer surplus from sales of a good at a given price is the area ABOVE the supply curve but BELOW the price. (consumer total surplus is vice versa)
Example of consumer surplus
There a 50$ dress that you want and is willing to pay. You have the money and everything but then the dress went on sale for 30$. In the end you save a total of $20.
example of consumer surplus part 2
There is a book for $30, and there are 5 students wanting to pay for the book. Aleisha would pay $59, Brad is $45, and claudia is $35. While Darren and edwina is below the asking price so they cant buy the book.
Why are competitive market usually efficient?
They allocate consumption of the good to the potential buyers who most value it. They allocate sales to the potential sellers who most value the right to sell the good (e.g., who have the lowest cost). They ensure that all transactions are mutually beneficial: Every consumer who makes a purchase values the good more than every seller who makes a sale.
How can we measure market efficiency?
Through consumer and producer surplus. consumer surplus# + producer surplus# ______________________________ total revenue
What is total surplus?
Total surplus is the sum of the PRODUCER and CONSUMER SURPLUSES
How do find the total consumer surplus of a triangle?
Use the 1/2Base x Height formula
Consumer surplus rises with a fall in price
When there is a new price, original buyers get an increase in consumer surplus, and new buyers add more consumer surplus/ ex- if the price was originally $30 but then dropped to $20
How do you find the total consumer surplus of Aleisha, Brad and Claudia?
by subtracting the price theyre willing to pay to the price the book actually cost. Then adding the end total sum together Aleisha - $59-$30 = $29 Brad's consumer surplus: $45 - $30 = $15 Claudia's consumer surplus: $35 - $30 = $5 29+15+5= total consumer surplus of $49
Profit rise in industries when....
consumers want more of that industry's products
If a dinner at Fast Eddy's tonight sells for $13, what is the value of Fast Eddy's producer surplus? First dinner- $3 second - 6 third - 10 fourth - 12 fifth - 15
only first dinner, second, third and fourth dinner would have producer surplus 13-3= 10 13-6= 7 13-10= 3 13-12= 1 total = $21
Why do market typically work so well?
well functioning market are effective because of: 1) Property rights 2) economic signals
If the price is $2010, what is the consumer surplus? Price is 2010 and $5000 Quantity is 1200
½(2010 - 5000) x 1200 = $ 1.794