Economics
Market Equilibrium Consumer and Producer Surplus
Market equilibrium occurs when the quantity of a good or service supplied by producers equals the quantity demanded by consumers, resulting in an efficient allocation of resources. Consumer surplus represents the difference between what consumers are willing to pay and what they actually pay, while producer surplus is the difference between the price received by producers and the minimum price they are willing to accept.
Written by Perlego with AI-assistance
Related key terms
1 of 5
7 Key excerpts on "Market Equilibrium Consumer and Producer Surplus"
eBook - PDF- David Shapiro, Daniel MacDonald, Steven A. Greenlaw(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
One typical way that economists define efficiency is when it is impossible to improve the situation of one party without imposing a cost on another. Conversely, if a situation is inefficient, it becomes possible to benefit at least one party without imposing costs on others. Efficiency in the demand and supply model has the same basic meaning: The economy is getting as much benefit as possible from its scarce resources and all the possible gains from trade have been achieved. In other words, the optimal amount of each good and service is produced and consumed. Consumer Surplus, Producer Surplus, Social Surplus Consider a market for tablet computers, as Figure 3.23 shows. The equilibrium price is $80 and the equilibrium quantity is 28 million. To see the benefits to consumers, look at the segment of the demand curve above the equilibrium point and to the left. This portion of the demand curve shows that at least some demanders would have been willing to pay more than $80 for a tablet. For example, point J shows that if the price were $90, 20 million tablets would be sold. Those consumers who would have been willing to pay $90 for a tablet based on the utility they expect to receive from it, but who were able to pay the equilibrium price of $80, clearly received a benefit beyond what they had to pay. Remember, the demand curve traces consumers’ willingness to pay for different quantities. The amount that individuals would have been willing to pay, minus the amount that they actually paid, is called consumer surplus. 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.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor(Authors)
- 2014(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? And what about the quantity supplied? Is there a shortage or a surplus in the market? If so, of 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 - PDF- 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.
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- 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.
eBook - PDF- David Besanko, Ronald Braeutigam(Authors)
- 2020(Publication Date)
- Wiley(Publisher)
equilibrium A point at which there is no tendency for the market price to change as long as exogenous variables remain unchanged. excess supply A situation in which the quantity supplied at a given price exceeds the quantity demanded. excess demand A situ- ation in which the quantity demanded at a given price exceeds the quantity sup- plied. Quantity (billions of bushels per year) Price (dollars per bushel) 13 14 11 8 9 $5 $3 Excess supply when price is $5 $4 E S D Excess demand when price is $3 FIGURE 2.5 Excess Demand and Excess Supply in Market for Corn If the price of corn were $3, per bushel, excess demand would result because 14 billion bush- els would be demanded, but only 9 billion bushels would be supplied. If the price of corn were $5 per bushel, excess supply would result because 13 billion bushels would be supplied but only 8 billion bushels would be demanded. L E A R N I N G - B Y- D O I N G E X E R C I S E 2 . 3 Calculating Equilibrium Price and Quantity Suppose the market demand curve for cranberries is given by the equation Q d = 500 − 4P, while the mar- ket supply curve for cranberries (when P ≥ 50) is described by the equation Q s = −100 + 2P, where P is the price of cranberries expressed in dollars per barrel, and quantity (Q d or Q s ) is in thousands of bar- rels per year. Problem At what price and quantity is the market for cranberries in equilibrium? Show this equilibrium graphically. Solution At equilibrium, the quantity supplied equals the quantity demanded, and we can use this relationship to solve for P: Q d = Q s , or 500 − 4P = −100 + 2P, which 35 2.1 DEMAND, SUPPLY, AND MARKET EQUILIBRIUM SHIFTS IN SUPPLY AND DEMAND Shifts in Either Supply or Demand The demand and supply curves discussed so far in this chapter were drawn under the assumption that all factors, except for price, that influence the quantity demanded and quantity supplied are fixed.
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.
Index pages curate the most relevant extracts from our library of academic textbooks. They’ve been created using an in-house natural language model (NLM), each adding context and meaning to key research topics.
