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GSU ECON 2106 - Consumer and Producer Surplus

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Microeconomics 2106Lecture 6Outline of Last Lecture Chapter 3I. Supply, Demand and EquilibriumII. Market Equilibrium III. Shortage; surplusIV. Equilibrium and Shifts of Demand and Supply CurveV. Simultaneous Shifts of Supply and DemandOutline of Current Lecture Chapter 4- What consumer surplus is and its relationship to the demand curve- What producer surplus is and its relationship to the supply curve- What total surplus is and how it can be used both to measure the gains from trade and illustrate why markets work so wellCurrent LectureConsumer Surplus and the Demand Curve-Consumer’s willingness to pay for a good is the maximum price at which he or she would buy that good.-Individual consumer surplus is the net gain to an individual buyer from the purchase of a good. It is equal to the difference between the buyer’s willingness to pay and the price paid. 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. A consumer’s willingness to pay for a good is the maximum price at which he or she would buy that good.Obtained from “Microeconomics by Krugman and Wells, 3rdEdition.”-Total consumer surplus: is the sum of the individual consumer surpluses of all the buyers of thegood. (The term consumer surplus is often used to refer to both individual and total consumer surplus)Consumer Surplus:Obtained from “Microeconomics by Krugman and Wells, 3rdEdition.”The total consumer surplus is the entire shaded area, that is, the sum of the individual consumer surpluses of Aleisha, Brad and Claudia ($29 + $15 + $5 = $49)The total consumer surplus generated by purchases of a good at a given price is equal to the area below the demand curve but above the price.Obtained from “Microeconomics by Krugman and Wells, 3rdEdition.”How Changing Prices Affect Consumer Surplus-A fall in the price of a good increases consumer surplus through two channels:- A gain to consumers who would have bought at the original price and- A gain to consumers who are persuaded to buy at the lower priceA Fall in the Market Price Increases Consumer Surplus: Producer Surplus and Supply Curve-A Potential seller’s cost is the lowest price at which he or she is willing to sell a good.-Individual producer surplus is the net gain to a seller from selling a good. It is equal to the difference between the price received and the seller’s cost.Obtained from “Microeconomics by Krugman and Wells, 3rdEdition.”A fall in the price of a computer from $5,000 to $1,500 leads to an increase in the quantity demanded and an increase in consumer surplus. The change in total consumer surplus is given by the sum of the shaded areas: the total area below the demand curve and between the old and new prices. The dark blue area represents the increase in consumer surplus for the 200,000 consumers who would have bought a computer at the original price of$5,000; they each receive an increase in consumer surplus of $3,500. The light blue area represents the increase in consumer surplus for those willing to buy at a price equal to or greater than $1,500 but less than $5,000. Similarly, arise in the price of a computer from $1,500 to $5,000 generates a decrease in consumer surplus equal to the sum ofthe two shaded areas.-Total producer surplus: is the sum of the individual producer surpluses of all sellers of a good.-Producer surplus: is the difference between market price and the price at which firms are willing to supply the product.Changes in Producer Surplus:-When the price of a good rises, producer surplus increases through two channels: - The gains of those who would have supplied the good even at the original, lower price- The gains of those who are induced to supply the good by the higher price.Obtained from “Microeconomics by Krugman and Wells, 3rdEdition.”Obtained from “Microeconomics by Krugman and Wells, 3rdEdition.”The total producer surplus from sales of a good at a given price is the area above the supply curve butbelow that price.Total Surplus: generated in a market is the total net gain to consumers and producers from trading in the market. It is the sum of the producer and the consumer surplus. The concepts of consumer and producer surplus can potentially help us understand why markets are an effectiveway to organize economic activity.A rise in the price of wheat from $5 to $7 leads to an increase inthe quantity supplied and an increase in producer surplus. The change in total producer surplus is given by the sum of the shaded areas: the total area above the supply curve but between the old and new prices. The dark red area represents the gain to the farmers who would have supplied 1 million bushels at the original price of $5; they each receive an increasein producer surplus of $2 for each of those bushels. The triangular light red area represents the increase in producer surplus achieved by the farmers who supply the additional 500,000 bushels because of the higher price. Similarly, a fall in the price of wheat generates a reduction in producer surplus equal to the sum of the shaded areas.Obtained from “Microeconomics by Krugman and Wells, 3rdEdition.”In the market for used textbooks, the equilibrium price is $30 and the equilibrium quantity is 1,000 books. Consumer surplus isgiven by the blue area, the area below the demand curve but above the price. Producer surplus is given by the red area, the area above the supply curve but below the price. The sum of the blue and the red areas is total surplus, the total benefit to society from the production and consumption of the good.Obtained from “Microeconomics by Krugman and Wells,


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