Transcript Consumer and Producer Surplus

Consumer and Producer Surplus
Consumer and producer surplus are
important concepts to use when
discussing economic welfare. This
presentation looks at each concept and
their application to market conditions
Consumer and Producer Surplus
Demand and Consumer Surplus
Assume the current market
price is £3 per pizza – the
consumer is prepared to buy
15 slices of pizza per week at
this price
Price per Pizza (£)
£3
Market Price
Demand
15th
Consumer and Producer Surplus
Quantity of Pizzas Demanded (Qd)
Demand and Consumer Surplus
Consumer would be willing to
pay £6 for 5 slices of pizza – in
fact the consumer only has to
pay £3 for this pizza
Price per Pizza (£)
£6
£3
Market Price
Demand
5th
Consumer and Producer Surplus
15th
Quantity of Pizzas Demanded (Qd)
Demand and Consumer Surplus
Consumer surplus is the
difference between what the
consumer is willing to pay and
the price they actually do pay
Price per Pizza (£)
£6
£3
Market Price
Demand
5th
Consumer and Producer Surplus
15th
Quantity of Pizzas Demanded (Qd)
Demand and Consumer Surplus
Price per Pizza (£)
£6
£4.50
£3
Market Price
Demand
5th
Consumer and Producer Surplus
10th
15th
Quantity of Pizzas Demanded (Qd)
Total Expenditure and Consumer Surplus
Total Spending
= price per unit
X
Quantity consumed
Price per Pizza (£)
£6
£4.50
£3
Market Price
Demand
5th
Consumer and Producer Surplus
10th
15th
Quantity of Pizzas Demanded (Qd)
Consumer Surplus at the Equilibrium Price
Price per Unit (£)
Market Supply
£20
Total willingness to pay
- actual amount paid
Market Demand
100
Consumer and Producer Surplus
Quantity
Consumer Surplus and Price Elasticity of Demand
Inelastic demand, consumers are insensitive to price
Price per Unit (£)
Market Supply
£20
Market Demand
100
Consumer and Producer Surplus
Quantity
An Inelastic Demand – High Level of Consumer Surplus
Price per Unit (£)
Market Supply
£20
Market Demand
100
Consumer and Producer Surplus
Quantity
Elastic Demand – a Lower Willingness to Pay
Price per Unit (£)
Elastic demand – low level of consumer surplus
Market Supply
£18
Market Demand
100
Consumer and Producer Surplus
Quantity
Consumer Surplus
Consumer surplus
 Is the difference between what consumers are willing to pay
and what they actually have to pay at market prices
 Represents the benefit to consumers of monetary exchange of
goods and services
Area of consumer surplus is shown by area above the market
price and below the demand curve
Consumers receive “surplus” when the marginal benefit of
another unit of the good exceeds the price paid
When demand is inelastic – producers may try to exploit
consumer surplus by raising price and turning this into extra
revenue
Consumer and Producer Surplus
Producer Surplus
Producer Surplus is the difference between what producers
are willing to accept to produce a good and the price they
actually receive in the market
Producer surplus shown by the area above the market supply
curve and below the market price
Producer surplus is included when we measure economic
welfare
Consumer and Producer Surplus
Showing Producer Surplus
Price per Unit (£)
Price is £20 – but firms would be willing to supply some units at a lower price
Market Supply
£20
Market Demand
100
Consumer and Producer Surplus
Quantity
Total Revenue (TR) = Price (P) x Quantity Supplied (Q)
Price per Unit (£)
Total revenue = £2000
Market Supply
£20
Market Demand
100
Consumer and Producer Surplus
Quantity
Producer Surplus
Price per Unit (£)
Producer Surplus
Market Supply
£20
Market Demand
100
Consumer and Producer Surplus
Quantity
Total Economic Welfare (Consumer + Producer
Surplus)
Price per Unit (£)
Consumer Surplus
Market Supply
£20
Producer Surplus
Market Demand
100
Consumer and Producer Surplus
Quantity