ECON 202 1nd Edition Lecture 14 Outline of Last Lecture I. Price Controlsa. Ceilings and FloorsII. Efficiency of Marketsa. Consumer SurplusOutline of Current Lecture III. Efficiency of Marketsa. Consumer Surplusb. Producer Surplusc. Total SurplusCurrent LectureEfficiency of MarketsConsumer Surplus – difference between the price a consumer is willing to pay for a good and the price the consumer actually pays for the good- Area under the demand curve and above the priceProducer Surplus – another way to interpret a supply curve is as a “willingness to sell” curve or “marginal cost” curveThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute. 123QD$4Price=$2.50$2$0.75PA’s PSB’s PSSellerMarginal CostA $0.75B $2.00C $4.00Producer surplus = market price – marginal costSeller Producer SurplusA $2.50 – $0.75 = $1.75B $2.50 - $2.00 = $0.50C Wont SellTotal Surplus $2.25In General: PS is the area under the price and above the supply curveExample:PS = ½ * b * hPS = ½ *(500) * (10-2)PS = 250 * 8PS = $2,000Sellers are $2000 better off from market participationTotal Surplus – the combination of consumer and producer surplus- Measures social welfare (society’s happiness)Example: A competitive market will result in Q*Q* is the optimum amount because it will maximize total surplusTotal Surplus = the Area of Δ ABCThe Efficiency of Competitive Equilibrium or Market Equilibrium- In competitive equilibrium marginal benefit = marginal costAt Q*, marginal benefit = marginal cost which is the efficient use of resources$10$2500PSPriceQDSDBQ*P*ACPPSCSAt a point to the left of Q*, marginal benefit is greater than marginal cost which means producing more can make society better offAt a point to the right of Q*, marginal benefit is less than marginal cost which means producing less can make society better offIn other words at Q* total surplus is maximizedLost surplus = deadweight lostWhen the quantity is greater than Q* you have to subtract the deadweight lost from the area ofthe Δ on the
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