Consumer surplus & producer

surplus
 Consumer surplus (CS) is the difference
between willingness to pay (WP) for a good or
service and the price actually paid (AP) by the
consumer.
WP is the maximum price at which a
consumer would buy a good or service.
 WP and CS
CS when the price of a used textbook is $30
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Potential buyer WP AP ICS = WP-AP
A $59 $30 $29=59-30
B 45 30 15= 45-30
C 35 30 5= 35-30
D 25 - -
E 10 - -
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All buyers TCS=$49
 ICS and TCS
The net gain that a buyer achieves from the
purchase of a good is called that buyers ICS.
It is equal to the difference between buyers
WP and AP.
The sum of ICS achieved by all the buyers of a
good is known as TCS achieved in the market.
Graphically TCS is equal to the area below the
demand curve but above the actual ptice.
 How Changing Prices Affect CS.
An increase in price decreases CS and a decrease
in price increases CS.
Potential buyer WP AP ICS
A $59 $20 $39
B 45 20 25
C 35 20 15
D 25 20 5
E 10 20 -
All buyers TCS= $84
Change in TCS=$84-$49=$35
 CS and the demand curve

Actual price
$30
$20

D
 Producer Surplus
PS is the difference between the price actually
received by the seller for a good or service
and sellers cost.
Sellers cost is the lowest price at which a
potential seller is willing to sell a good or
service.
 PS when the price of a used book is $30
------------------------------------------------------------
Potential seller PR cost IPS= PR-AP
A $30 $5 $25=$30-$5
B $30 $15 $15=$30-$15
C $30 $25 $5=$30-$25
D - $35 ---
E - $45 ----
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All sellers total producer surplus=$45
 IPS and TPS defined
IPS is the net gain to an individual seller from
selling a good. It is the difference between the
price received and sellers cost.
TPS in a market is the sum of IPS of all sellers
of a good in a market.
 How changing prices affect PS.
An increase in price increases PS and a decrease in
price decreases PS.
Potential sellers cost PR IPS=PR-cost
A $5 $20 $20-$5=$15
B 15 20 20-15=5
C 25 - -
D 35 - -
E 45 - -
--------------------------------------------------------------
All sellers Total producer surplus=$20
Change in TPS=$45-$20=$25
Producer surplus and the supply curve.

price
S
E
$30 D
A B
$20

S C

Quantity supplied