Consumer Surplus

  • Meaning

    • the difference between the buyer's willingness to pay versus what he actually pays

  • Graph

    • On a supply and demand graph, the area of consumers surplus (CS) is below the demand curve but above the equilibrium price

Machine generated alternative text: figure 49.3 Consumer Surplus The demand curve for computers is smooth be- cause there are many potential buyers. At a price of $1 ,500, 1 million computers are de- manded. The consumer surplus at this price is equal to the shaded area: the area below the demand curve but above the price. This is the total net gain to consumers generated from buying and consuming computers when the price is $1 ,500. Price of computer Consumer surplus $1,500 Price 1 million Quantity of computers

  • Example 1

table 49.1 Consumer Surplus When the Price of a Used Textbook Is $30 Potential buyer Aleisha Brad Claudia Darren Edwina All buyers Willingness to pay $59 45 35 25 10 Price paid $30 30 30 Individual consumer surplus = Willingness to pay — Price paid $29 15 5 Total consumer surplus $49

Price of book $59 45 35 30 25 10 Aleisha's consumer surplus: $59 - $30 = $29 Aleisha Brad's consumer surplus: $45 - = $15 Brad Claudia's consumer surplus: $35 - = $5 Claudia Price Darren 2 3 4 Edwina 5 Quantity of books

  • Example 2

    If Aurelia is willing to pay $5 for a concert ticket and Rose is willing to pay $10 for a concert ticket and Kaylee is willing to pay $15 for a concert ticket but the market price of the ticket is $8, what is the total consumer surplus after all tickets are purchased? 10-g-n 15-g=$7 Concer+ Tickeb with a q CONumer

Producer Surplus

  • Meaning

    • the difference between the price a sellers pays for and what he was actually willing to sell for

  • Graph

    • On a supply and demand graph, the producer surplus is above the supply curve but below the equilibrium price.

figure 49.8 Producer Surplus Here is the supply curve for wheat. At a price of $5 per bushel, farmers supply 1 million bushels. The producer surplus at this price is equal to the shaded area: the area above the supply curve but below the price. This is the total gain to producers—fanners in this case—from supplying their product when the price is $5. Price of wheat (per bushel) $5 Producer surplus 1 million Price Quantity of wheat (bushels)

  • Example 1

    table 49.2 Producer Surplus When the Price of a Used Textbook Is $30 Potcntial scllcr Andrew Carlos Donna Engelbert All sellers Cost $5 15 25 35 45 Price rcccivcd $30 30 30 Individual producer surplus = Price received — Cost $25 15 5 Total producer surplus $45

    Price of book $45 35 30 25 15 5 o S Engelbert Donna Carlos's producer surplus Andrew's producer surplus 5 Price Betty Andrew 1 2 3 Carlos 4 Bettys producer surplus Quantity of books

  • Example 2

    If Aram is willing to sell a candy bar for $1 and Nathan is willing to sell a candy bar for $1.50 and Gerardo is willing to sell a candy bar for $2.00, how many candy bars will be sold and what is the total producer surplus if the price of the candy bar is $2.00? Price : a.oo $1.50 a—ISO Geordo via-as

Total Surplus

  • Meaning

    • the sum of consumer and producer surplus

  • Graph

    • the area between the supply and demand curves up to the equilibrium quantity

    Consumer surplus Equilibrium . price Producer surplus Equilitrium quantity D Supply Demand Quantity

Effects of Taxes on Surplus

  • How does a tax affect hotel owners?

    • An excise tax on hotel owners will shift the supply curve to the left

    • The equilibrium price will be higher and the equilibrium quantity will be lower

    CSI psacs) CSO (g-q) 100 4<100

  • How does a tax effect hotel guests

    • An excise tax on hotel guests will shift the demand curve to the left

    • The equilibrium price will be higher and the equilibrium quantity will be lower

    • The tax incidence in both cases are identical

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  • How the imposition of a tax will decrease consumer and producer surplus

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A Tax Reduces Consumer and Producer Surplus Before the tax, the equilibrium price and quantity are Pgand respectively. After an excise tax of T per unit is imposed, the price to consumers rises to Pcand consumer surplus falls by the sum of the dark blue rectangle, labeled A, and the light blue triangle, labeled B. The tax also causes the price to producers to fall to Pp;producer surplus falls by the sum of the dark red rectangle, labeled C, and the light red triangle, lab4ed E The government receives revenue from the tax, QTX T, which is given by the sum of the areas A and C Areas B and Frepresent the losses to consumer and pro- ducer surplus that are not collected by the govern- mentas revenue; they are the deadweight loss to S)Ciety of the tax. Excise tax = T Price Fall in consumer surplus due to tax Fall in producer surplus due to tax Quantity

  • Deadweight loss

figure 50.12 The Deadweight Loss of a Tax A tax leads to a deadweight loss because it cre- ates inefficienw: some mutually beneficial trans- actions never take place because of the tax, namely the transactions OF — QT. The yellow area here represents the value of the deadweight loss: it is the total surplus that would have been gained from the 0€— QTtransactions. If the tax had not discouraged transactions—had the number of transactions remained at Of—no deadweight loss muld have been incurred. Price Excise tax = T Deadweight loss Quantity

International Trade

  • Autarky

    • the quality of being self-sufficient with no imports or exports, a closed economy

  • Free trade and Tariffs

    • Free trade increases total surplus

    • Tariffs serve to reduce allocative efficiency

Importing Countries

  • The World Price (Pw) will be below the autarky price and total surplus will increase

  • Domestic consumers gain, domestic producers lose, but the net gain is positive

Machine generated alternative text: Before Trade Consumer Surplus Producer Surpl us Total Surplus Price of Textiles Price before trade Price after trade After Trade c Change The area D shows the increase in total surplus and represents the gains from trade. c Domestic quantity supplied mports Domestic quantity demanded Domestic supply World price Domestic demand Quantity of Textiles

  • Buyers are better off (consumer surplus rises from A to A

    • B + D)

  • Sellers are worse off (producer surplus falls from B + C to C)

  • Total surplus rises by an amount equal to area D

  • Trade raises the economic well-being of the country as a whole.

Exporting Countries

  • The World Price (Pw) will be above the autarky price and total surplus will increase

  • Domestic consumers lose, domestic producers gain, but the net gain is positive

After Trade Consumer Surplus Producer Surplus Total Surplus Price of Textiles Price after trade Price before trade Before Trade c Change The area D shows the increase in total surplus and represents the gains from trade. c Exports D xports Domestic quantity demanded Domestic quantity supplied Domestic supply World price Domestic demand Quantity of Textiles

  • Sellers are better off (producer surplus rises from C to B

    • C + D)

  • Buyers are worse off (consumer surplus falls from A + B to A)

  • Total surplus rises by an amount equal to area D

  • Trade raises the economic well-being of the country as a whole.

The Effects of a Tariff

  • Tariff

    • a government tax on imports or exports

  • Example 1

    Graph what would happen if an importing countyy imposes a tariff in order to protect the corn industry from low world prices. Who gains? Who loses? loss? Is this efficient? 'WiFfs% •rwe MAI CS+PS or surplus S J ce01

  • Example 2

FIGURE 4 The Effects of a Tariff Consumer Surplus Producer Surplus Government Revenue Total Surplus A tariff reduces the quantity of imports and moves a market closer to the equilibrium that would exist without trade. Total surplus falls by an amount equal to area D + F. These two triangles represent the deadweight loss from the tariff. Before Tariff None After Tariff Change The area D + F shows the fall in total surplus and represents the deadweight loss of the tariff. Price of Textiles Price with tariff Price without tariff Domestic supply Equilibrium without trade c Imports with tariff Imports without tariff Tariff Domestic demand World price Quantity of Textiles

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