Transcript Econ_111-09-23

Consumer and Producer Surplus Applications
Review Consumer and Producer Surplus
Consumer Surplus: The net benefit buyers enjoy from purchasing and consuming the
good.
Height of Market Demand Curve: Reflects the benefit a buyer
enjoys from consuming a specific unit of the good.
Consumer Surplus: The net benefit buyers enjoy from
purchasing and consuming the good; the benefit each buyer
enjoys from consuming the good less what each buyer must pay.
Area Beneath the Demand Curve Lying Above the Price:
Reflects all the net benefits buyers enjoy, the consumer surplus,
from purchasing and consuming the good.
Producer Surplus: The net benefit sellers enjoy from producing and selling the good
Height of Market Supply Curve: The seller’s opportunity
cost of providing a specific unit of the good.
Producer Surplus: The net benefit sellers enjoy from
producing and selling the good; what each seller receives from
the sale of the good less the opportunity cost each seller incurs
by providing it.
Area above the Supply Curve Lying beneath the Price:
Reflects all the net benefit sellers enjoy, the producer surplus,
from producing and selling the good.
Tax: PF = PC  Tax
PF = PC  .40
Review: Tax Incidence
P ($/gallon)
First, the no tax
equilibrium.
PC = 2.40 P = 2.10
PF = 2.00


Quantity Demanded
Quantity Supplied
8,000
7,500
PC** = 2.40
==

Equilibrium
8,000
7,500
.40
S
P* = 2.10
PF** = 2.00
D
Quantity supplied
determined by PF
Quantity demanded
determined by PC
Q (thousands of
gallon per day)
Q** = 7,500
Q* = 8,000
Start
at the no taxquantity
equilibrium
and move left until the vertical gap between the demand and
The equilibrium
decreases.
supply
curves
the amount
the tax. increases, but by less than the full amount of the tax.
The price
fromequals
the perspective
ofof
consumers
The associated quantity is the new equilibrium quantity.
The price from the perspective of firms decreases, but by less than the full amount of the tax.
The
curve between
is the equilibrium
The point
burdenonofthe
thedemand
tax is shared
consumersprice
and from
firms.the perspective of consumers.
Question:
How
we quantify
the equilibrium
burden borne
by consumers
and firms?of firms.
The point on
the can
supply
curve is the
price
from the perspective
75 = 2,325
Consumer Surplus –2,250
Area +Beneath
the Demand
P ($/gallon) Market Calculate the
Areas:
for
Curve Lying Above the
all the net
750Price:
+ 25 =Reflects
775
B: .30 benefits
 7,500 buyers
= 2,250
Gasoline
enjoy,2,250
the consumer
+ 750 = surplus,
3,000 from
the=good.
C: ½ purchasing
.30500 =and
75 consuming
75 + 25
100
Burden
borne
D: .10 Producer
 7,500 Surplus
= 750 – Area above theby
A
Supply
consumers and firms
E: ½ Curve
.10500
= 25
Lying
beneath the Price: Reflects all the
= 2,325 + 775 = $3,100
PC** = 2.40
net benefit sellers enjoy, the producer surplus,
Benefit
from producing and selling
thereaped
good. by = $3,000
government
B
C
Dead weight loss
= $100
$.40
S
(Excess burden)
P* = 2.10
Annual per capita loss of consumer
E
2,325 × 365  $125
D
surplus:
D
6,700
PF** = 2.00
F
How
much
Question: By
how
much
firms
hurt?
total
surplus
is hurt?
lost?
consumers
are governments
helped?
Q (thousands of
Q** = 7,500
Q* = 8,000 gallon per day)
Consumer Surplus
Producer Surplus
Government Surplus
Total Surplus
Before Tax
A+B+C
D+E+F
Nothing
A+B+C+D+E+F
After Tax
A
F
B+D
A+B+D+F
Change
Lose B+C
Lose D+E
Gain B+D
Lose C+E
$2,325 thou
$775 thou
+$3,000 thou
$100 thou
Total Surplus and Efficiency
P
300
Review
Student
Andy
Kate
Dan
Liz
Meg
Ned
Benefits of
Tutoring
275
225
175
100
75
25
S
250
Tutor
Costs
of Tutoring
200
Kim
John
Adam
Lisa
Walt
Beth
275
225
200
125
75
25
150
100
50
D
Q
1
Height of Market Demand Curve:
Reflects the benefit a buyer enjoys from
consuming a specific unit of the good.
2
3
4
5
6
Height of Market Supply Curve:
The seller’s opportunity cost of
providing a specific unit of the good.
Total Surplus: The total net benefits to society as a whole that the
provision of a good provides.
Strategy: Four scenarios
Scenario 1: One Tutor is Provided
P
300
Student
Andy
Kate
Dan
Liz
Meg
Ned
Benefits of
Tutoring
275
225
175
100
75
25
S
250
Tutor
Costs
of Tutoring
200
Kim
John
Adam
Lisa
Walt
Beth
275
225
200
125
75
25
150
100
50
D
Q
1
Which student values tutoring by
the most?
Andy who values tutoring by $275.
2
3
4
5
6
Which tutor incurs the lowest costs of
tutoring?
Beth who incurs cost of $25
Net benefit of the first tutor to society as a whole equals $250
The vertical gap between the market demand and supply curves.
Question: From the perspective of society as a whole does it make sense for Beth to tutor?
Answer: Yes.
Scenario 2: A Second Tutor Is Provided
P
300
Student
Benefits of
Tutoring
Andy
Kate
Dan
Liz
Meg
Ned
275
225
175
100
75
25
S
250
Tutor
Costs
of Tutoring
200
Kim
John
Adam
Lisa
Walt
Beth
275
225
200
125
75
25
150
100
50
D
Q
1
Which student values tutoring by
the second most?
Kate who values tutoring by $225.
2
3
4
5
6
Which tutor incurs the second lowest
costs of tutoring?
Walt who incurs cost of $75
Net benefit of the second tutor to society as a whole equals $150
The vertical gap between the market demand and supply curves.
Question: From the perspective of society as a whole does it make sense for Walt to tutor?
Answer: Yes.
Scenario 3: A Third Tutor Is Provided
P
300
Student
Benefits of
Tutoring
Andy
Kate
Dan
Liz
Meg
Ned
275
225
175
100
75
25
S
250
Tutor
Costs
of Tutoring
200
Kim
John
Adam
Lisa
Walt
Beth
275
225
200
125
75
25
150
100
50
D
Q
1
Which student values tutoring by
the third most?
Dan who values tutoring by $175.
2
3
4
5
6
Which tutor incurs the third lowest
costs of tutoring?
Lisa who incurs cost of $125
Net benefit of the third tutor to society as a whole equals $50
The vertical gap between the market demand and supply curves.
Question: From the perspective of society as a whole does it make sense for Lisa to tutor?
Answer: Yes.
Scenario 4: A Fourth Tutor Is Provided
P
300
Student
Andy
Kate
Dan
Liz
Meg
Ned
Benefits of
Tutoring
275
225
175
100
75
25
S
250
Tutor
Costs
of Tutoring
200
Kim
John
Adam
Lisa
Walt
Beth
275
225
200
125
75
25
150
100
50
D
Q
1
Which student values tutoring by
the fourth most?
Liz who values tutoring by $100.
2
3
4
5
6
Which tutor incurs the fourth lowest
costs of tutoring?
Lisa who incurs cost of $200
Net benefit of the third tutor to society as a whole equals negative $100
The vertical gap between the market demand and supply curves.
Question: From the perspective of society as a whole does it make sense for Adam to tutor?
Answer: No.
Total Surplus: The total net benefits to society as a whole that the provision of a good
provides.
P
300
S
Costs
Benefits of
Tutor
of Tutoring
Student
Tutoring 250
Andy
275
200
Kate
225
150
Dan
175
Liz
100
100
Meg
75
Ned
25
50
Question: What is the
efficient number of tutors?
3
1
2
Tutors
Total Surplus
1
$250
2
250 + 150 = $400
3
250 + 150 + 50 = $450
4
250 + 150 + 50  100 = $350
Kim
John
Adam
Lisa
Walt
Beth
275
225
200
125
75
25
D
Q
3
Efficiency: Whenever total surplus, the total net
benefit to society as a whole, is maximized.
4
5
6
Summary
A tutor should be provided whenever the
benefits exceed the costs; that is, whenever the
demand curve lies above the supply curve.
A tutor should not be provided whenever the
costs exceed the benefits; that is, whenever the
supply curve lies above the demand curve.
Generalization: Total Surplus and Efficiency
Efficiency: Whenever total surplus, the total net benefit to society as a whole, is maximized.
Height of Market
Demand Curve: Reflects
the benefit a buyer enjoys
from consuming a specific
unit of the good.
Height of Market
Supply Curve: The
seller’s opportunity cost
of providing a specific
unit of the good.
Efficiency Guidelines
P
When the demand curve lies
above the supply curve.

The benefits of providing a
P*
unit exceed its costs.

More of the good should be
provided
Benefits
Exceed
Costs
Costs
Exceed
Benefits
S
When the supply curve lies
above the demand curve.

The costs of providing a
unit exceed its benefits.

Less of the good should be
provided
D
Q
Efficient
Quantity
Question: What is the equilibrium quantity?
The efficient quantity appears to be the equilibrium quantity.
Markets and Efficiency
Efficiency: Whenever total surplus, the total net benefit to society as a whole, is maximized.
P
P
No Tax
Total surplus
Tax
S
Total surplus
S
PC**
Tax
P*
PF**
D
Q*
Q
Question: Do markets always lead to efficiency?
Answer: No.
D
Q**
Q
Dead weight loss:
Loss of total surplus
as a consequence of
the tax.
There are other factors which also cause markets to fail. We will explore them in later
lectures.