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Consumer and
Producer Surplus
11
Learning Objective
Consumer surplus
2. Producer surplus
3. Market efficiency and Deadweight
Loss
4. Price Floors and Ceilings
1.
12
1. Consumer Surplus
Measures
13
Consumer Surplus
Using
14
Consumer Surplus
Using
surplus in a market
price
15
P1
Price
Consumer
surplus
Initial
consumer
surplus
P1
B
Demand
Q1
Quantity
P2
C
new Consumer
surplus
F
Demand
Q1
Q2
Quantity
In panel (a), the price is P1, the quantity demanded is Q1, and consumer surplus equals the area of
the triangle ABC. When the price falls from P1 to P2, as in panel (b), the quantity demanded rises
from Q1 to Q2, and the consumer surplus rises to the area of the triangle ADF. The increase in
consumer surplus (area BCFD)
16
7
17
Consumer Surplus
2. Producer Surplus
Measures
19
Producer Surplus
Using
110
Producer Surplus
Using
surplus in a market
curve
111
Price
P2
P1
B
Producer
surplus
Supply
New producer
surplus
Supply
P1
D
B
Initial
producer
surplus
Q1
Q2 Quantity
0
Quantity
In panel (a), the price is P1, the quantity supplied is Q1, and producer surplus equals the area of the
triangle ABC. When the price rises from P1 to P2, as in panel (b), the quantity supplied rises from Q1
to Q2, and the producer surplus rises to the area of the triangle ADF. The increase in producer
surplus (area BCFD)
0
Q1
112
P
S
CS
TS = CS + PS
PS
Q
114
Since Consumer Surplus and Producer Surplus are represented by triangles, to calculate
Base * Height
their value you can utilize the formula for the area of a triangle =
.
2
= (1/2)(2000)
= 1000
P
120
S
70
50
40
Q
115
116
Equilibrium
price
Consumer
surplus
E
Producer
surplus
B
C
Demand
Equilibrium
Quantity
quantity
Total surplusthe sum of consumer and producer surplusis the area
between the supply and demand curves up to the equilibrium quantity
117
Deadweight Loss
Deadweight loss is the reduction in economic
surplus resulting from a market not being in
competitive equilibrium.
The net loss of both consumer & producer
surplus resulting from underproduction or
overproduction of a product.
118
Deadweight Loss
FIGURE
4-7 Is Not in Equilibrium, There Is a Deadweight Loss
When
a Market
Economic surplus is maximized when a market is in competitive equilibrium. When a
market is not in equilibrium, there is a deadweight loss.
When the price of Thai tea is $2.20, instead of $2.00, consumer surplus declines from an
amount equal to the sum of areas A, B, and C to just area A. Producer surplus increases
from the sum of areas D and E to the sum of areas B and D. At competitive equilibrium,
there is no deadweight loss. At a price of $2.20, there is a deadweight loss equal to the
sum of areas C and E.
119
120
Price Ceiling
Price
Supply
Equilibrium
price
$3
2
Price
ceiling
Shortage
Demand
0
75
125
Quantity Quantity
supplied demanded
Quantity
121
Price Floor
Price
Supply
4
Price
floor
$3
Equilibrium
price
Demand
0
100
Equilibrium Quantity
Quantity
122
123
124
125
Summary
Consumer
Summary
Producer
Summary
The
Summary
A price
A price