Producer Surplus

9 Key excerpts on "Producer Surplus"

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  Profit Maximization (Ultimate Goal of Business)

  • (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.

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  Microeconomic Foundations I

  Choice and Competitive Markets

  • David M. Kreps(Author)
  • 2012(Publication Date)
  • Princeton University Press

    (Publisher)

  Chapter Twelve

  Producer 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

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  Principles of Macroeconomics for AP® Courses 2e

  • 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.

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  Macroeconomics for Today

  • 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.

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  The Economics Companion

  • 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.

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  Construction Microeconomics

  • Christian Brockmann(Author)
  • 2023(Publication Date)
  • Wiley-Blackwell

    (Publisher)

  The producer realizes now an economic profit since the price is higher than the aver- age total costs for the quantity provided. This is the grey area in the left panel. The economic profit of the producers does not remain unnoticed; it attracts others who will enter the market. Remember that there are no transaction costs to the new entrants and they have the same cost curves as all others. The new entrants expand supply from Q 2 to Q 3 by shifting the supply curves outward from S O to S N . The price adjusts to the new intersection of S N and D N (point C). The long‐run supply curve runs through point A and Point C. The faster the market adjustments, the smaller the fluctuations around the hori- zontal long run supply curve. Thus, in the long run, economic profits are close to zero. 5.6 Welfare The market welfare model postulates that the market equilibrium maximizes the net benefits to society from production and consumption (Dorman 2014). It rests on three assumptions. D O Q SMC Q P P SAC S O D N q 1P q 2P Q 1 Q 2 Market Individual producer P 1 P 2 B A Figure 5.15 Short run curve with increase in demand. D O Q SMC Q P P SAC S O D N q 1P q 2P Q 1 Q 2 Market Individual producer P 1 P 2 B A S N Long run supply curve Q 3 C Figure 5.16 Long-run supply curve. 5.6 ­elfare 111 The most problematic assumption is that for the demand curve as it rests on further rather restrictive conditions: ● Societal benefit is the sum of individual benefits. ● Each point on the demand curve represents the willingness to pay of some consumer. ● Willingness to pay represents an amount of utility. ● The marginal utility of money is the same for all consumers. ● There are no other influences than the willingness to pay. The most controversial point is the societal benefit. As a sum of individual benefits (util- ity), we can write it as mathematical equation (Varian 2014): W u u u n i i ( , , ) 1 1 n (5.4) This idea is based on the utilitarian ethics of Bentham.

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  Principles of Economics in Context

  • 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.

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  Cost-Benefit Analysis

  Financial And Economic Appraisal Using Spreadsheets

  • Harry F. Campbell, Richard P.C. Brown(Authors)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  The changes in price affect all units of the good or service traded, including the quantity traded without the project (such as Q 0 in Figure 5.2) and the additional quantity traded with the project (such as Q 1 Q 0), and surplus is associated with each of these quantities. We start by considering the surplus generated by the additional quantity traded as a result of the project, and will subsequently consider the surplus associated with the original quantity traded. Since the Market Analysis of the project, the results of which are summarized by Area A + B in Figure 6.1, is conducted at the market prices which will exist in the world with the project, additional output resulting from the project is priced at the new lower price, and additional input supplied to meet the demands of the project is priced at the new higher price. This means that the consumer or Producer Surplus accruing to consumers of the project’s output or suppliers of project inputs is not included in the project net benefit as measured by market prices. In the Efficiency Analysis, in contrast, output is valued at, and input costed at, an average of the without and with prices, which will be higher than the with price of output and lower than the with price of an input in the case of the price changes considered here. As compared with the Market Analysis, the higher price of output (lower price of input) used in the Efficiency Analysis reflects the benefit in the form of consumer (producer) surplus generated by the project’s output or input; we can think of the pricing procedure in the Efficiency Analysis as “making room” in the Referent Group Analysis for the benefit of the additional surplus. This benefit can be entered under the appropriate category, such as consumer or labour benefits, in Area C + D of Figure 6.1

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  Cost-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

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