ECO 2030 1nd Edition Lecture 17 Outline of Last Lecture I Elasticities Outline of Current Lecture II Welfare Economics III Consumer Surplus IV Producer Surplus Current Lecture Welfare Economics how the allocation of resources affects well being has nothing to do with government programs WTP maximum amount a buyer will pay for a good Consumer Surplus the amount a buyer is WTP minus the amount you actually pay Savings or internal happiness CS WTP P WTP and the demand curve with 4 potential buyers Name WTP for an Ipod Anthony 250 Chad 175 Flea 300 John 125 At any point Q the height of the demand curve WTP of the MArginal Buyer Note the shape of the demand curve is jagged because there are only 4 buyers in this market A market with many buyers is a straight line These 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 CS base x height Understanding the graph and CS If P 260 then the only buyer is Flea Her CS 40x1 40 If P 125 or less then the demand will be 4 and CS will be the greater area above that price Each person has their individual CS as shown above with Fleas CS To get total CS the CS of all buyers is added up Both Consumer Surplus CS and Producer Surplus PS are measured by the area shown in the graph CS with lots of buyers demand is now smooth CS base x height If the price goes from P1 to P2 and the demand is the same then the CS will be the area above the P2 price line therefore price has an effect on CS Producer Surplus is the amount a seller is paid minus the sellers cost Profit PS related to the supply curve as CS is related to the demand curve The area below the price and above the supply curve measures the PS in the market like the graph above If P 600 then Grandma s PS 100 If the P 800 then total PS is the sum of Grandma s and Georgia s PS and so forth Grandma s PS increases from 100 to 300 and Georgias PS is 200 So total PS 500
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