Producer and Consumer Surplus
Producer and Consumer Surplus
Producer and Consumer Surplus
When was the last time you got yourself a genuine bargain?
Lesson Objectives
By the end of this lesson you will:
Price
what
The fall in the marginal benefit means that we (as consumers) are willing
to pay less for the next unit
This means the suppliers have to tempt us with lower prices to persuade
us to buy more
The following Tutor2u slides illustrate this using the example of buying a
pizza
As consumption increases,
the marginal benefit from
extra units is assumed to
decline
diminishing marginal
satisfaction
Therefore ..willingness
to pay for the product will
decline
Demand
Market Price
Demand
15th
Market Price
Demand
5th
15th
Market Price
Demand
5th
15th
4.50
Market Price
Demand
5th
10t
h
15th
4.50
Market Price
Demand
5th
10t
h
15th
Market Supply
20
Total willingness to pay
- actual amount paid
Market Demand
100
Quantity
20
Market Demand
100
Quantity
20
Market Demand
100
Quantity
18
Market Demand
100
Quantity
D1
100
120
Quantity
22
18
D2
D1
100
120
Quantity
surplus
the
Consumer Surplus
Consumer surplus is a measure of the welfare that
people gain from the consumption of goods and
services, or a measure of the benefits they derive from
the exchange of goods
Consumer surplus is the difference between the total
amount that consumers are willing and able to pay for a
good or service (indicated by the demand curve) and the
total amount that they actually pay (the market price)
The level of consumer surplus is shown by the area
under the demand curve and above the ruling market
price
Price
Price
Supply
S1
S2
Consumer
Surplus
P2
P1
P1
P2
D2
D1
Q1
Q2
Demand
Quantity
Q1
Q2
Quantity
surplus
the
Producer Surplus
Producer surplus is a measure of producer welfare. It is
measured as the difference between what producers
are willing and able to supply a good for and the price
they actually receive
The level of producer surplus is shown by the area
above the supply curve and below the market price
The minimum price that the firm requires to supply to
the market is shown by where the supply curve cuts the
y-axis
As market price rises so supply expands (we move up
the supply curve)
20
Market Demand
100
Quantity
20
Market Demand
100
Quantity
Producer Surplus
Price per Unit ()
Producer Surplus
Market Supply
20
Market Demand
100
Quantity
Consumer Surplus
Market Supply
20
Producer Surplus
Market Demand
100
Quantity