Economics
Consumer and Producer Surplus
Consumer surplus is the difference between what consumers are willing to pay for a good or service and what they actually pay. It represents the benefit consumers receive from purchasing a product at a price lower than their maximum willingness to pay. Producer surplus, on the other hand, is the difference between the price producers are willing to accept for a good or service and the price they actually receive.
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12 Key excerpts on "Consumer and Producer Surplus"
No longer available |Learn more- (Author)
- 2014(Publication Date)
- Orange Apple(Publisher)
____________________ WORLD TECHNOLOGIES ____________________ Chapter- 6 Economic Surplus Graph illustrating consumer (red) and producer (blue) surpluses on a supply and demand chart The term surplus is used in economics for several related quantities. The consumer surplus (sometimes named consumer's surplus or consumers' surplus ) is the amount that consumers benefit by being able to purchase a product for a price that is less than the most that they would be willing to pay. The producer surplus is the amount that producers benefit by selling at a market price mechanism that is higher than the least that they would be willing to sell for. Note that producer surplus generally flows through to the owners of the factors of production: in perfect competition, no producer surplus accrues to the individual firm. This is the same as saying that economic profit is driven to zero. Real-world businesses ____________________ WORLD TECHNOLOGIES ____________________ generally own or control some of their inputs, meaning that they receive the producer's surplus due to them: this is known as normal profit, and is a component of the firm's opportunity costs. If the markets for factors are perfectly competitive as well, producer surplus ultimately ends up as economic rent to the owners of scarce inputs such as land. Overview On a standard supply and demand (S&D) diagram, consumer surplus (CS) is the triangular area above the price level and below the demand curve, since intramarginal consumers are paying less for the item than the maximum that they would pay. In some schools of heterodox economics, the economic surplus denotes the total income which the ruling class derives from its ownership of scarce factors of production, which is either reinvested or spent on consumption. In Marxian economics, the term surplus may also refer to surplus value, surplus product and surplus labour.
eBook - PDF- David Shapiro, Daniel MacDonald, Steven A. Greenlaw(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
Consumer surplus is the area labeled F—that is, the area above the market price and below the demand curve. 74 3 • Demand and Supply Access for free at openstax.org FIGURE 3.23 Consumer and Producer Surplus The somewhat triangular area labeled by F shows the area of consumer surplus, which shows that the equilibrium price in the market was less than what many of the consumers were willing to pay. Point J on the demand curve shows that, even at the price of $90, consumers would have been willing to purchase a quantity of 20 million. The somewhat triangular area labeled by G shows the area of producer surplus, which shows that the equilibrium price received in the market was more than what many of the producers were willing to accept for their products. For example, point K on the supply curve shows that at a price of $45, firms would have been willing to supply a quantity of 14 million. The supply curve shows the quantity that firms are willing to supply at each price. For example, point K in Figure 3.23 illustrates that, at $45, firms would still have been willing to supply a quantity of 14 million. Those producers who would have been willing to supply the tablets at $45, but who were instead able to charge the equilibrium price of $80, clearly received an extra benefit beyond what they required to supply the product. The extra benefit producers receive from selling a good or service, measured by the price the producer actually received minus the price the producer would have been willing to accept is called producer surplus. In Figure 3.23, producer surplus is the area labeled G—that is, the area between the market price and the segment of the supply curve below the equilibrium. The sum of consumer surplus and producer surplus is social surplus, also referred to as economic surplus or total surplus. In Figure 3.23 we show social surplus as the area F + G. Social surplus is larger at equilibrium quantity and price than it would be at any other quantity.
eBook - ePubMicroeconomic Foundations I
Choice and Competitive Markets
- David M. Kreps(Author)
- 2012(Publication Date)
- Princeton University Press(Publisher)
Chapter TwelveProducer and Consumer Surplus
Most courses in microeconomics at some point engage in policy evaluation: What happens if the government taxes or subsidizes the sale of some good? What happens if a price ceiling or a price floor is established? What if imports into a particular domestic market are capped at some level?The discussion of “what happens?” can begin and end with an analysis of changes in prices and quantities. But when it comes to evaluation, one typically seeks dollar-denominated measures of the impact such policies have on firms inside the industry and on consumers of the specific product. The concepts of producer and consumer surplus appear at this point; the former is advanced as a dollar-denominated measure of the impact the policy has on producers; the latter is asserted to be a dollar-denominated measure of its impact on consumers. These concepts are defined graphically, by pictures such as Figures 12.1a and b . In this chapter, we explore the foundations of these two concepts.Figure 12.1. Producer and consumer surplus. Intermediate-level textbooks in microeconomics often have the pictures shown here, accompanied by text such as “The shaded region in panel a is producer surplus, a dollar-denominated measure of the value producers obtain from this market. The shaded region in panel b is consumer surplus, a dollar-denominated measure of the value obtained by consumers.” The objective of this chapter is to make these notions as precise as we can.12.1. Producer Surplus
Producer surplus has a relatively simple story, although one with a hidden trap. The story concerns the market for a particular good supplied by a number F of firms. We assume that the firms are all competitive, engaged in profit maximization in the sense and style of Chapter 9 ; Zf will denote the production-possibility set of firm f. We let p ∈ be the vector of all prices, and we will suppose that coordinate indices have been chosen so that i
eBook - PDF- Irvin B. Tucker, Irvin Tucker(Authors)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
KEY CONCEPTS Consumer surplus Producer surplus Deadweight loss SUMMARY • Consumer surplus measures the value between the price consumers are willing to pay for a prod-uct along the demand curve and the price they actually pay. • Producer surplus measures the value between the actual selling price of a product and the price along the supply curve at which sellers are willing to sell the product. Total surplus is the sum of consumer surplus and producer surplus. • Deadweight loss is the result of a market that operates in disequilibrium. It is the net loss of both Consumer and Producer Surplus resulting from underproduction or overproduction of a product. SUMMARY OF CONCLUSION STATEMENTS • Total consumer surplus measured in dollars is represented by the total area under the market demand curve and above the equilibrium price. • Total producer surplus measured in dollars is represented by the total area under the equilib-rium price and above the supply curve. • The total dollar value of potential benefits not achieved is the deadweight loss resulting from too few or too many resources used in a given market. APPENDIX TO CHAPTER 3 | Consumer Surplus, Producer Surplus, and Market Efficiency 95 Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. ............................................................................................................................................................................................................................................. STUDY QUESTIONS AND PROBLEMS 1. Consider the market for used textbooks.
- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
Producer surplus is the gap between the price for which producers are willing to sell a product, based on their costs, and the market equilibrium price. Social surplus is the sum of consumer surplus and producer surplus. Total surplus is larger at the equilibrium quantity and price than it will be at any other quantity and price. Deadweight loss is loss in total surplus that occurs when the economy produces at an inefficient quantity. SELF-CHECK QUESTIONS 1. Review Figure 3.4. Suppose the price of gasoline is $1.60 per gallon. Is the quantity demanded higher or lower than at the equilibrium price of $1.40 per gallon? What about the quantity supplied? Is there a shortage or a surplus in the market? If so, how much? 2. Why do economists use the ceteris paribus assumption? 3. In an analysis of the market for paint, an economist discovers the facts listed below. State whether each of these changes will affect supply or demand, and in what direction. a. There have recently been some important cost-saving inventions in the technology for making paint. b. Paint is lasting longer, so that property owners need not repaint as often. c. Because of severe hailstorms, many people need to repaint now. d. The hailstorms damaged several factories that make paint, forcing them to close down for several months. 4. Many changes are affecting the market for oil. Predict how each of the following events will affect the equilibrium price and quantity in the market for oil. In each case, state how the event will affect the supply and demand diagram. Create a sketch of the diagram if necessary. a. Cars are becoming more fuel efficient, and therefore get more miles to the gallon. b. The winter is exceptionally cold. c. A major discovery of new oil is made off the coast of Norway. d. The economies of some major oil-using nations, like Japan, slow down. e. A war in the Middle East disrupts oil-pumping schedules. f. Landlords install additional insulation in buildings.
eBook - ePubEconomics For Dummies
Book + Chapter Quizzes Online
- Sean Masaki Flynn(Author)
- 2023(Publication Date)
- For Dummies(Publisher)
less than the $5 per gallon market price. You can see this by the fact that the supply curve lies below the horizontal price line up to the very last drop of the 1,000th gallon. The fact that they receive $5 per gallon for all of it despite being willing to produce it for less is the source of the producer surplus, which is represented by the area of the shaded triangle.Using the formula for the area of a triangle ( ), you can compute that the producer surplus in this example is $2,000. Producers are $2,000 better off after selling the 1,000 gallons of oil because the total cash they get from selling the 1,000 gallons is $2,000 greater than the minimum amount that they’d have been willing to accept to produce those units.Computing total surplus
The total surplus that society receives from producing the socially optimal level of output of a certain good or service is simply the sum of the consumer surplus and producer surplus generated by that output level.Figure 7-6 illustrates total surplus for a market in which the equilibrium price and quantity are, respectively, and . (If this graph looks familiar, that’s because it’s just like Figure 7-1 .)© John Wiley & Sons, Inc.FIGURE 7-6: Total surplus is the sum of consumer surplus and producer surplus.I’ve drawn the total surplus area so you can clearly see that it’s made up of consumer surplus (the vertically striped area) plus producer surplus (the diagonally striped area). The two are separated by the horizontal line extending from the market equilibrium price ($5).By again using the formula for the area of a triangle, you multiply to figure out that for this graph the total surplus is $16. The total gain to society of producing at this output level is $16.Contemplating total surplus
Total surplus is important because it puts a number on the gains that come from production and trade. Firms make things to generate a profit. People spend money on products because consuming those products makes them happy. And total surplus tells you just how much better off both consumers and producers are after interacting with each other.
eBook - PDFWelfare Economics
Towards a More Complete Analysis
- Y. Ng(Author)
- 2003(Publication Date)
- Palgrave Macmillan(Publisher)
4 The Magnitude of Welfare Change: Consumer Surplus The discussion of the magnitude of welfare change in this chapter centres on the concept of consumer surplus associated with a price change. But some of the measures of consumer surplus – such as compensating variation, equivalent variation and our proposed measure, marginal-dollar equivalent (see the appendix to this chapter) – can also be used to measure welfare changes that are associated with other changes. The concept of consumer surplus has given rise to a great deal of debate and confusion. While it has been regarded as superfluous, or at least the theoretical foundation of using consumer surplus as a measure of welfare change is usually regarded as suspect, its use in cost–benefit analyses and policy discussions has been widespread. This chapter reviews the various measures of consumer surplus and discusses some complications, before justifying its use as an approximate measure. 4.1 The origin of the concept: Dupuit and Marshall The concept of consumer surplus was formulated in about 1850 by the French engineer J. Dupuit, who was concerned with the question as to the amount of worthwhile subsidy towards the cost of constructing a bridge. He was clearly aware of the fact that consumers are usually willing to pay more for a good than they actually pay. Hence the consumer obtains an ‘excess satisfaction’, or a surplus. The concept of consumer surplus gained prominence after the publication of Marshall’s Principles of Economics. Marshall was the first to introduce the concept to the English-speaking world, but it is said that he was less than generous in acknowledging Dupuit’s priority (see Pfouts, 1953, p. 316). Marshall (1920, p. 124) defined consumer surplus as ‘the excess of the price which he would be willing to pay rather than go without the thing, over that which he actually does pay’.
eBook - PDF- Neva Goodwin, Jonathan M. Harris, Julie A. Nelson, Brian Roach, Mariano Torras, Jonathan Harris, Julie Nelson(Authors)
- 2019(Publication Date)
- Routledge(Publisher)
7. Match each concept in Column A with an example in Column B. Consumer Maximum Willingness to Pay #1 $550 #2 $530 #3 $490 #4 $440 #5 $420 #6 $370 #7 $350 #8 $310 Rent (per month) Quantity of apartments supplied $800 100 $700 80 $600 60 $500 40 $400 20 $300 0 Column A Column B a. Consumer surplus 1. Profits b. The government mandates that the price of milk must be at least $3 per gallon 2. A price ceiling c. Marginal change 3. An increase in demand of one unit d. Producer surplus 4. A loss in social welfare that occurs when a market is not in equilibrium e. Deadweight loss 5. Part of the psychic benefits of buying something f. The government mandates that the price of gas can be no higher than $4 per gallon 6. A school of economics that opposes government regulation g. Laissez-faire economics 7. A price floor C HAPTER 6 – W ELFARE A NALYSIS 146 N OTES 1. The “magnified” demand curve in Figure 6.2 is not actually the same as the one in Figure 6.1 . In Figure 6.2 we use a different slope, in order to focus on a price change that causes the quantity demanded to decrease by exactly one cup. 2. If you have studied calculus, you can use integration to determine areas under demand (and supply) curves. This is done in more advanced economics courses. 3. Technically speaking, this is not quite true. From a marginal perspective, producer surplus is the difference between the price of a product and its marginal cost. Some of this surplus, however, may be used to pay fixed expenses and thus not represent profit to the producer. 4. We have again adjusted the slope of the curve in order to focus on a change in quantity of one. 5. Note that there may be points where the marginal production cost exactly equals the price. Thus the pro-ducer would not increase profits by offering the unit for sale but would not lose money either. In this case, we would say that the producer is indifferent between selling and not selling the unit.
eBook - PDF- Graham Mallard(Author)
- 2017(Publication Date)
- Red Globe Press(Publisher)
It’s always important to check answers such as these. This is easy to do in this case since the market demand curve is linear and so the consumer surplus is a simple triangle with height 12, base 300 and so area of 0.5×12×300=1800. As with differentiation, you should be comfortable with and fluent in integra-tion. Unfortunately, space precludes a full treatment of the technique here, but you can find sections outlining the relevant rules in all good mathematics for economics textbooks (see Chapter 15 for suggestions). Once the rules are mas-tered, integration is straightforward. BOX 7.3: producer surplus We can use the same procedure to calculate producer surplus – calculating the size of the area above the market supply curve and beneath the market price up to the final unit traded. With a linear market supply curve producer surplus can be 2 2 introducing smaller-scale analysis: the microeconomic world 116 Quantity supplied (bottles) Price (£) 110 300 P = 50 + 0.2Q s 50 Producer surplus Figure B7.3 Producer surplus easily calculated by computing the area of the triangle using the 1 __ 2 × base × height method. For market supply curves that are actually curves, it’s more complicated because we need to calculate the area under the curve using integration and to then subtract this from the rectangle representing producerrevenue. The general rule for calculating producer surplus, then, is given as Equation B7.3.1, in which Q* s is the quantity bought and sold in the market,‘equation’ is the equation of the market supply curve, and P* is the market price. Please note: as with consumer surplus, it’s important to use the inverse market supply curve equation if integrat-ing with respect to the quantity bought and sold. You can use the equation for the normal market supply curve, but you then need to integrate it with respect to the market price rather than quantity.
- E. Mishan, E. J. Mishan(Authors)
- 2013(Publication Date)
- Routledge(Publisher)
market demand curves only. It is practically impossible to estimate demand curves, and therefore the relevant consumer surpluses, of single individuals.Fortunately, it is the consumer surplus for the market, for society in effect, that the normative economist is trying to capture. Therefore estimates of the market demand curves for particular goods will admirably serve his purpose – which is not to say that there are not statistical difficulties in estimating many such demand curves owing to the paucity of data.After this somewhat leisurely exposition, we can begin to romp along at a brisker pace. Figure 8 shows a market demand curve DD in which the price has fallen from P2 , say $10 per unit x, at which price the amount OQ2 was bought, to Pl , say $8 per unit, at which price the amount OQ1 is bought. A fall in the price of x by $2 implies an increase in the welfare of buyers of x; at least, it does so if no other goods prices rise, which we may assume in a partial context. The measure of the gain in social welfare from this fall in price is the consumer surplus as measured by the shaded area between the two horizontal price-lines from P2 and P1 respectively.If this is not evident at first, look at it thus: if the price P2 were first established where previously the good x had been unobtainable, the improvement would have been measured as a consumer surplus equal to the triangular area DP2 E. If, instead, the lower price P1 had first been established, the improvement would have been a larger consumer surplus, one equal to the larger triangular area DP1 G. It follows that the difference to consumers of x from having the lower market price P1 rather than P2 is the difference between the two triangular areas, a difference that is measured by the shaded horizontal strip P2 P1 GE. This latter area then is the consumer surplus for a fall in price from P2 to P1 .Figure 8Perhaps you would like to look at it another way, more intuitively obvious to some. The rectangular part of the shaded area P2 P1 FE is the price difference on the original amount of x, OQ2 , bought when the price was P2 . Were consumers restricted to buying this same amount OQ2 of x (even though the price had fallen to P1 ) they would have saved just that much money. For this shaded rectangle P2 P1 FE is equal to the price difference (P2 – P1 ) times OQ2 of x. Thus this area measures the most consumers would pay for this fall in price provided they were allowed to buy no more than OQ2 , this being the amount of x they bought at the old price P2
eBook - ePubCost-Benefit Analysis
Financial and Economic Appraisal Using Spreadsheets
- Harry F. Campbell, Richard P.C. Brown(Authors)
- 2022(Publication Date)
- Routledge(Publisher)
with-and-without comparison conducted in the Efficiency Analysis. In both cases a positive value indicates a more productive use of inputs.We now turn to Consumer and Producer Surplus changes associated with the quantity of the output or input traded in the world without the project. As noted above, a fall in output price will benefit the consumers of the original quantity of the good traded, but it will also be to the detriment of the firms supplying the good. Similarly, a rise in input price, such as an increase in the wage, will benefit the suppliers of the original quantity of the input, but will similarly be to the detriment of the firms employing the input and may result in consumers paying higher prices for output These effects are pecuniary effects, as discussed in Section 7.2, and they net out of the Efficiency Analysis. If they are included in the Referent Group Analysis, it is likely to be in the category described by Area C in Table 6.1 (net Referent Group benefits not measured by market prices), given the localised nature of the project’s effects as discussed above. Whether they are relevant to the decision about the project is a matter for the decision-maker, who may not be interested in changes in the distribution of surplus among consumers, labour and firms, especially given that most households represent more than one of these categories of economic agents, but if they are included, and these agents are all members of the Referent Group, they are entered twice in the Referent Group Analysis, once as a benefit and once as a cost, so that they cancel out in the measure of overall project effects, thereby preserving the adding-up property of the cost-benefit model.Suppose now that the output of a project, such as an improvement to a public road leading to a national park, is not marketed. As we saw from Figure 7.1 , the project benefit takes the form of an increase in consumer surplus accruing to users of the park. As in the case of changes in Consumer and Producer Surplus induced by changes in market prices and associated with project output or inputs, this form of net benefit is not measured by the Market Analysis. In the case of improved access to the national park, the change in surplus is included in area C or D in Table 6.1 , depending on whether or not the consumers are members of the Referent Group. In contrast to the case of a marketed output, surplus accruing to consumers of the without quantity of the service (Area P0 ABP1 in Figure 7.1
eBook - ePub- Neva Goodwin, Jonathan M. Harris, Julie A. Nelson, Pratistha Joshi Rajkarnikar, Brian Roach, Mariano Torras(Authors)
- 2022(Publication Date)
- Routledge(Publisher)
The difference between these two curves at any point represents the gap between the maximum WTP of consumers and the production costs of suppliers. Some of this difference is “captured” by producers as profits, and the rest is consumer surplus. As long as the demand curve is above the supply curve, society receives net benefits by producing that unit of a product. However, if the supply curve is above the demand curve, then marginal costs exceed marginal benefits, and society would actually be worse off if that unit were produced and sold. Thus, as long as the demand curve is higher than the supply curve, it makes sense (from the perspective of social welfare) for society to produce each unit, to the point where marginal benefits equal marginal costs. Note in Figure 5.9 that this is true up to the equilibrium quantity of 700 cups of coffee. However, when the supply curve is higher than the demand curve, marginal costs exceed marginal benefits and society should not produce these units. Any production above 700 cups of coffee would decrease social welfare. In other words, the market equilibrium is the outcome that maximizes social welfare. We now test this result by considering what happens when the market is not allowed to reach equilibrium—when a regulation is enacted that sets a price different from the equilibrium price. 4.2 Price Ceilings Sometimes, governments intervene in markets to set price limits, either above or below the market equilibrium price. Somewhat confusingly, a price set below the market price is called a price ceiling (it is a “ceiling” because it establishes a maximum allowable price). price ceiling: a regulation that specifies a maximum price for a particular product Price ceilings are usually set with the goal of helping certain groups of consumers by keeping prices low. A classic example is rent control, which specifies maximum prices for rental units
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