Prepared by:

Fernando & Yvonn Quijano

2007 Worth Publishers Essentials of Economics Krugman Wells Olney

How much am I willing to pay for that used textbook?

What you will learn in this chapter: The meaning of consumer surplus and its relationship to the demand curve The meaning of producer surplus and its relationship to the supply curve The meaning and importance of total surplus and how it can be used both to measure the gains from trade and to evaluate the efficiency of a market How to use changes in total surplus to measure the deadweight loss of taxes Why the deadweight loss of a tax means that its true cost is more than the amount of tax revenue collected
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chapter

2007 Worth Publishers Essentials of Economics Krugman Wells Olney

Consumer Surplus and the Demand Curve

Willingness to Pay and the Demand Curve
A consumers willingness to pay for a good is the maximum price at which he or she would buy that good.

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Consumer Surplus and the Demand Curve

Willingness to Pay and the Demand Curve

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Consumer Surplus and the Demand Curve

Willingness to Pay and Consumer Surplus
TABLE 6-1
Consumer Surplus When the Price of a Used Textbook Is $30
Potential buyer Aleisha Brad Claudia Darren Edwina Willingness to pay $59 45 35 25 10 Price paid $30 30 30 Individual consumer surplus = willingness to pay price paid $30 15 5 Total consumer surplus: $49

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Consumer Surplus and the Demand Curve

Willingness to Pay and Consumer Surplus
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 buyers willingness to pay and the price paid. Total consumer surplus is the sum of the individual consumer surpluses of all the buyers of a good. The term consumer surplus is often used to refer to both individual and to total consumer surplus.

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Consumer Surplus and the Demand Curve

Willingness to Pay and Consumer Surplus

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Consumer Surplus and the Demand Curve

Willingness to Pay and Consumer Surplus

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Consumer Surplus and the Demand Curve

How Changing Prices Affect Consumer Surplus

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Consumer Surplus and the Demand Curve

How Changing Prices Affect Consumer Surplus

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Producer Surplus and the Supply Curve

Cost and Producer Surplus

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Producer Surplus and the Supply Curve

Cost and Producer Surplus
A potential sellers cost is the lowest price at which he or she is willing to sell a good.

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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 sellers cost. Total producer surplus in a market is the sum of the individual producer surpluses of all the sellers of a good. Economists use the term producer surplus to refer both to individual and to total producer surplus.
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Producer Surplus and the Supply Curve

Cost and Producer Surplus
TABLE 6-2
Producer Surplus When the Price of a Used Textbook Is $30
Potential seller Andrew Betty Carlos Donna Engelbert Cost $5 15 25 35 45 Price received $30 30 30 Individual producer surplus = price received cost $25 15 5 Total consumer surplus: $45

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Producer Surplus and the Supply Curve

Cost and Producer Surplus

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Producer Surplus and the Supply Curve

Cost and Producer Surplus

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Producer Surplus and the Supply Curve

Changes in Producer Surplus

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Consumer Surplus, Producer Surplus, and the Gains from Trade

The Gains from Trade

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Consumer Surplus, Producer Surplus, and the Gains from Trade

The Gains from Trade
The 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.

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Consumer Surplus, Producer Surplus, and the Gains from Trade

The Efficiency of Markets: A Preliminary View

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Consumer Surplus, Producer Surplus, and the Gains from Trade

The Efficiency of Markets: A Preliminary View

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Consumer Surplus, Producer Surplus, and the Gains from Trade

The Efficiency of Markets: A Preliminary View

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Consumer Surplus, Producer Surplus, and the Gains from Trade

The Efficiency of Markets: A Preliminary View
The market equilibrium maximizes total surplusthe sum of producer and consumer surplus. It does this because the market performs four important functions: 1. It allocates consumption of the good to the potential buyers who value it the most, as indicated by the fact that they have the highest willingness to pay. 2. It allocates sales to the potential sellers who most value the right to sell the good, as indicated by the fact that they have the lowest cost. 3. It ensures that every consumer who makes a purchase values the good more than every seller who makes a sale, so that all transactions are mutually beneficial. 4. It ensures that every potential buyer who doesnt make a purchase values the good less than every potential seller who doesnt make a sale, so that no mutually beneficial transactions are missed.

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Maximizing total surplus at your local hardware store.

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2007 Worth Publishers Essentials of Economics Krugman Wells Olney

Applying Consumer and Producer Surplus: The Efficiency Costs of a Tax

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The excess burden, or deadweight loss, from a tax is the extra cost in the form of inefficiency that results because the tax discourages mutually beneficial transactions.

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Applying Consumer and Producer Surplus: The Efficiency Costs of a Tax

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Applying Consumer and Producer Surplus: The Efficiency Costs of a Tax

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Applying Consumer and Producer Surplus: The Efficiency Costs of a Tax

Deadweight Loss and Elasticities

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Applying Consumer and Producer Surplus: The Efficiency Costs of a Tax

Deadweight Loss and Elasticities

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KEY TERMS

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Willingness to pay
Individual consumer surplus Total consumer surplus Consumer surplus

Individual producer surplus Total producer surplus Producer surplus Total surplus Excess burden Deadweight loss

Cost

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