Transcript Document

By:
Krish Ohri and
Janica Portillas
 Consumer - A person who purchase goods and services for
their personal use
 Producer - A person, company, or country that makes,
grows, or supplies goods or commodities for sales.
 Surplus - An amount of something left over when
requirements have been met; an excess of production or
supply over demand.
 Welfare - The health, happiness, and fortune of a person or
a group
 Using the areas under curves of supply and demand curves to
calculate the consumer and producer surplus
 Consumer Surplus is a measure of the welfare that people
gain from consuming goods and services
 Producer Surplus is a measure of the welfare that the
suppliers get from selling goods and services
 Willingness to Pay - The amount of money that a consumer
will pay for the product (how much the consumer values the
product)
 Consumer Surplus = Willingness to pay – What the Consumer
Actually Pays For
 Example: For three cookies, I am willing to pay 5 dollars
 So if I pay 3 dollars for the cookies, my consumer surplus is:
5-3= $2
Lets look at an example:
Consumer Surplus
Price of
Album
John’s willingness to pay
$100
Paul’s willingness to pay
80
George’s willingness to pay
70
Ringo’s willingness to pay
50
Demand
0
1
2
3
4
Quantity of
Albums
Copyright©2003 Southwestern/Thomson Learning
Consumer Surplus
(a) Price = $80
Price of
Album
$100
John’s consumer surplus ($20)
80
70
50
Demand
0
1
2
3
4
Quantity of
Albums
Copyright©2003 Southwestern/Thomson Learning
Consumer Surplus
(b) Price = $70
Price of
Album
$100
John’s consumer surplus ($30)
80
Paul’s consumer
surplus ($10)
70
50
Total
consumer
surplus ($40)
Demand
0
1
2
3
4 Quantity of
Albums
Copyright©2003 Southwestern/Thomson Learning
Figure 3 How the Price Affects Consumer Surplus
(b) Consumer Surplus at Price P
Price
A
Initial
consumer
surplus
P1
P2
0
C
B
Consumer surplus
to new consumers
F
D
E
Additional consumer
surplus to initial
consumers
Q1
Demand
Q2
Quantity
Copyright©2003 Southwestern/Thomson Learning
Effects of the Changes in Supply and Demand Curve
on Consumer Surplus
 Producer surplus is the amount a seller is paid for a good
minus the seller’s cost.
 So if it costs $2 to make a burger and I sell it (as I am the
seller) for $3, the producer surplus will be $1.
 It measures the benefit to sellers participating in a market.
 The area above the supply curve and below the price is the
producer surplus.
Lets look at an example:
Producer Surplus
Producer Surplus
(a) Price = $600
Price of
House
Painting
Supply
$900
800
600
500
Grandma’s producer
surplus ($100)
0
1
2
3
4
Quantity of
Houses Painted
Copyright©2003 Southwestern/Thomson Learning
Producer Surplus
(b) Price = $800
Price of
House
Painting
$900
Supply
Total
producer
surplus ($500)
800
600
Georgia’s producer
surplus ($200)
500
Grandma’s producer
surplus ($300)
0
1
2
3
4
Quantity of
Houses Painted
Copyright©2003 Southwestern/Thomson Learning
Producer Surplus
(a) Producer Surplus at Price P
Price
Supply
P1
B
Producer
surplus
C
A
0
Q1
Quantity
Copyright©2003 Southwestern/Thomson Learning
Producer Surplus
(b) Producer Surplus at Price P
Price
Supply
Additional producer
surplus to initial
producers
P2
P1
D
E
F
B
Initial
producer
surplus
C
Producer surplus
to new producers
A
0
Q1
Q2
Quantity
Copyright©2003 Southwestern/Thomson Learning
Effects of the Changes in Supply Curve
on Producer Surplus
Effects of the Changes in Demand Curve
on Producer Surplus
 Consumer surplus can be used to see the benefit that
consumers will gain in the market and it is represented by the
area below the demand curve and above the price.
 Consumer Surplus = Willingness to pay- Actual Price Paid
 Producer Surplus can be used to see the benefit that
producers will gain in the market and it is represented by the
area above the supply curve and below the price.
 Producer Surplus = Price the Seller Sold - The cost of
producing it
1. Consumer surplus:
a. Is the difference between the maximum prices consumers are
willing to pay for a product and the lower equilibrium price.
b. The difference between the maximum prices consumers are
willing to pay for a product and the minimum prices producers
are willing to accept
c. The difference between the minimum prices producers are
willing to accept for a product and the higher equilibrium
price.
d. Rises as the equilibrium quantity decreases
2. Produce surplus:
a. Is the difference between the maximum prices consumers are
willing to pay for a product and the lower equilibrium price
b. Rises as equilibrium price
c. Is the difference between the minimum prices producers are
willing to accept for a product and the higher equilibrium price
d. Is the difference between the maximum prices consumers are
willing to pay for a product and the minimum prices producers
are willing to accept
3. Jennifer buys costume jewelry for $33 for which she was
willing to pay $42. The minimum acceptable price to the
seller, Nathan was $30. Jennifer experiences:
a. A consumer surplus of $12 and Nathan experiences a producer
surplus of $3.
b. A producer surplus of $9 and Nathan experiences a consumer
surplus of $3.
c. A consumer surplus of $9 and Nathan experiences a producer
surplus of $3.
d. A producer surplus of $9 and Nathan experiences a producer
surplus of $12.
4. Graphically, consumer surplus is measured as a triangle:
a. Under the demand curve and below the equilibrium price.
b. Under the demand curve and above the equilibrium price.
c. Above the supply curve and above the equilibrium price.
d. Above the supply curve and below the equilibrium price.
5. Graphically, producer surplus is measured as the triangle:
a. Under the demand curve and below the equilibrium price.
b. Under the demand curve and above the equilibrium price.
c. Above the supply curve and above the equilibrium price.
d. Above the supply curve and below the equilibrium price.
6. Assuming the equilibrium
price P0, consumer surplus is
represented by areas:
a. a + b
b. a + b + c + d
c. c + d
d. a + c
7. Assuming equilibrium price
P0, producer surplus is
represented by areas:
a. a + b
b. a + b + c + d
c. c + d
d. a + c
8. The area that identifies
the maximum sum of
consumer surplus and
producer surplus is:
a. a + b + c + d + e + f
b. c + d + f
c. a + b + e
d. a + b + c + d