Transcript Consumer and Producer Surplus Slides

Consumer Surplus
9/6/16
I. Definition: the benefits from being able to purchase a
good
A. In other words: the difference between how
much you are willing/able to pay vs. how much
ACTUALLY paid
II. Example: buying used textbooks
Potential Buyers
Willingness to Pay
Aleisha
$59
Brad
$45
Claudia
$35
Darren
$25
Edwina
$10
A. Suppose books = $30
Aleisha’s net gain = $59-$30 = $29 (individ. consumer surplus)
Brad = $45-$30 = $15
Claudia = $35-$30 = $5
Total consumer surplus = 29+15+5 = $49
B. Suppose books are now $20:
1. Calculate total consumer surplus:
The rule: As price falls, consumer surplus increases (the
area under the curve and above the price increases)
C. Suppose price increases to $40. Calculate the
consumer surplus.
The rule: As price rises, consumer surplus decreases.
Quantity of Peppers Casey’s Willingness
to Pay
Josey’s Willingness
to Pay
1st pepper
$0.90
$0.80
2nd pepper
0.70
0.60
3rd pepper
0.50
0.40
4th pepper
0.30
0.30
Consider the market for cheese-stuffed jalapeno peppers. Use
the table:
a. to construct the demand schedules (each person’s) for
peppers for prices of $0.00, $0.10, and so on, and
b. to calculate the total consumer surplus when the
price of a pepper is $0.40.
Price of
pepper
Quantity
demanded
by Josey
Quantity
demanded
by Casey
Total
quantity of
peppers
demanded
$0.90
0
1
1
0.80
1
1
2
0.70
1
2
3
0.60
2
2
4
0.50
2
3
5
0.40
2
3
5
0.30
4
4
8
0.20
4
4
8
0.10
4
4
8
0.00
4
4
8
Casey’s consumer
surplus = 0.50 +
0.30 + 0.10
Josey’s consumer
surplus = 0.40 +
0.20 + 0
$0.90 + $0.60 =
$1.50
Another way to calculate consumer surplus: find area
under the curve, but above the price (note: you cannot
do this if you’re given specific individual data points!)
Warm-up: February 17, 2016
Below is Ari’s demand schedule for pasta.
Quantity of Willingness a. Draw Ari’s demand curve for pasta. Shade in
pasta
to pay
the area representing his consumer surplus
1
$10
when the price per serving is $4. (Look at the
2
8
b.
3
6
4
4
c.
5
2
d.
6
0
e.
graph in your notes to help get started.)
At this price, how many servings will Ari buy?
How much consumer surplus will he receive?
Suppose the price increases to $6. By how
much does his consumer surplus decrease?
Suppose the restaurant is offering an “all you
can eat” special for $25. How much will Ari
eat, and what will his consumer surplus be?
Suppose you own the restaurant and Ari is a
“typical” customer. What is the highest price
you can charge for the special and still keep
customers?
Warm-up: February 18, 2015
Homework problem #3.
Warm-up – Sept 23, 2014
Determine the amount of producer surplus generated in each
of the following situations.
1.Gordon lists his old electric trains on eBay. He sets a
minimum acceptable price (reserve price) of $75. After 5 days
of bidding, the final high bid is exactly $75. He accepts the
bid.
2.Susan advertises her car for sale in the newspaper for
$2,000, but she is willing to sell the car for any price higher
than $1,500. The best offer she gets is $1,200, which she
declines.
3.Sanjay likes his job so much that he would be willing to do it
for free. However, his annual salary is $80,000.
Producer Surplus
(2/17/15)
I. Definition: benefits that sellers receive – or the difference
between the lowest price willing to sell for vs. ACTUAL
selling price
II. Example: selling used textbooks
Potential sellers
Seller’s cost
Andrew
$5
Betty
$15
Carlos
$25
Donna
$35
Engelbert
$45
A. Suppose price of book = $30
Andrew’s net gain: $30-$5 = $25 (individ. prod. surplus)
Betty: $30-$15 = $15
Carlos: $30-$25 = $5
Total producer surplus = $25+15+5 = $45
Another way to calculate producer surplus: find area
above the curve but below price
B. Suppose books are now $40. Calculate the producer
surplus.
The rules: A rise in price causes an increase in
producer surplus. A fall in price causes a decrease in
producer surplus.
Graph the following supply and demand schedules. PLOT EACH POINT
Price of
book
Quantity
demanded
Quantity
supplied
$60
30
0
65
27
3
70
25
7
75
20
7
80
17
8
85
15
15
90
12
16
95
9
17
100
8
29
105
2
31
110
0
34
a. Shade in the regions
that represent CS and
PS.
b. Calculate CS and PS.
c. Now the second edition
of the book comes out,
and the willingness of
each buyer to pay for
the old version falls by
$20.
In a table, show a new
demand schedule and
calculate CS and PS at
the new equilibrium.
Quantity of
peppers
Cara’s cost
Jamie’s cost
1st pepper
$0.10
$0.30
2nd pepper
0.10
0.50
3rd pepper
0.40
0.70
4th pepper
0.60
0.90
Consider the market for cheese-stuffed jalapeno peppers. Use the
table to:
a. construct the supply schedule for peppers for prices of
$0.00, $0.10, and so on, and
b. calculate the total producer surplus when the price of a
pepper is $0.70
Price of
peppers
Quantity
of peppers
supplied
Quantity
supplied
by Cara
Quantity
supplied
by Jamie
$0.90
8
4
4
0.80
7
4
3
0.70
7
4
3
0.60
6
4
2
0.50
5
3
2
0.40
4
3
1
0.30
3
2
1
0.20
2
2
0
0.10
2
2
0
0.00
0
0
0
Cara’s producer surplus =
0.10+0.30+0.60+0.60 =
$1.60
Jamie’s producer surplus =
0.20+0.40 = 0.60
Total producer surplus =
$1.60+0.60 = $2.20
Gains from trade
A. Markets generally make society as well-off as
possible given the available resources
B. Total surplus: sum of producer and consumer
surplus
Why market equilibrium = max total surplus
1. Those that value product most will get it
2. Those who most value the right to sell product will
sell it (they have lowest cost)
3. Every consumer values the product more than seller
– mutually beneficial transactions
If government intervenes  less efficiency  decrease
in total surplus
Warm-up: February 18, 2016
In your notebook, draw 4 diagrams that represent the
market for books. For each situation, apply the correct
shift in supply or demand, and analyze what happens
to consumer and producer surplus.
1. The cost of paper has increased.
2. Kindles and audio books have become more
popular.
3. Printing presses have become much more efficient
in production.
4. Incomes have increased (books are a normal
good).
1. Suppose consumer income increases. If iPods are a normal good, the
equilibrium price of an iPod will _________, and producer surplus in the iPod
market will __________.
A) decrease, increase
B) increase, increase
C) decrease, decrease
D) increase, decrease
E) increase, not change
2. The figure to the right shows Clara’s demand for
CDs. If the market price for a CD is $10, then
Clara
A) receives a total of $10 of consumer surplus
B) receives a total of $80 of consumer surplus
C) receives a total of $60 of consumer surplus
D) will buy no CDs
E) receives no consumer surplus on the 8th CD
she buys
Increases and decreases in surplus
(For each, draw a diagram)
A. Income increases (normal good)
Effect on CS? PS?
B. Cost of production decreases
Effect on CS? PS?
C. Personal income taxes increase
Effect on CS? PS?
D. Corporate (business) taxes increase
Effect on CS? PS?