Consumer & producer surplus

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Intros
Lessons
  1. Consumer & Producer Surplus Overview:
  2. Consumer Surplus
    • Willing to pay vs actually pay
    • Algebraic Calculation of Consumer Surplus
    • Graphical Calculation of Consumer Surplus
    • An Example
  3. Producer Surplus
    • Price producer receives vs minimum price producer accepts
    • Algebraic Calculation of Producer Surplus
    • Graphical Calculation of Producer Surplus
    • An Example
  4. Economic Surplus
    • The total benefit from consumer and producer
    • Sum of consumer surplus and producer surplus
    • Goal is to maximize economic surplus
    • An Example
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Examples
Lessons
  1. Finding the Consumer Surplus
    Suppose the demand curve is P = 500 - 20Q  and  P = 200 + 5Q.
    1. Find the market equilibrium
    2. Find the consumer surplus
  2. Suppose the demand curve is P = 800 - 5Q  and  P = 800 + 5Q.
    1. Find the market equilibrium
    2. Find the consumer surplus
  3. Finding the Producer Surplus
    Suppose the demand curve is P = 400 - 20Q  and  P = 300 + 5Q.
    1. Find the market equilibrium
    2. Find the producer surplus
  4. Suppose the demand curve is P = 300 - 3Q  and  P = 250 + Q.
    1. Find the market equilibrium
    2. Find the producer surplus
  5. Finding the Economic Surplus
    Suppose the demand curve is P = 500 - 10Q  and  P = 300 + 5Q.
    1. Find the market equilibrium
    2. Find the consumer surplus
    3. Find the producer surplus
    4. Find the economic surplus
Topic Notes
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Consumer Surplus


Consumer Surplus: the difference between what consumers are willing to pay and what they actually pay.


Algebraically, we calculate this as



Consumer Surplus = Marginal benefit - Price


Graphically, we calculate this by finding the area under the demand curve and above the price paid, up to the quantity bought. Since the demand and supply curve are linear, most of the consumer surplus we see are triangles.

Consumer surplus = marginal benefit - price

Recall the area of triangle is:

A = bh2\large \frac{bh}{2}


Producer Surplus

Producer Surplus: the difference between what price the producers receive from the good and the minimum price the producer is willing to accept.

Algebraically, we calculate this as

Producer Surplus = Price - Marginal Cost


Graphically, we calculate the area that is above the supply curve and below the price sold, up to the quantity supplied. Once again, the area we see are usually triangles.

Producer surplus = Price - Marginal Cost

Economic Surplus

Economic Surplus: is the total benefit gained from both the consumer and producer. In other words, it is the sum of the consumer surplus and producer surplus.

Economic Surplus = Consumer Surplus + Producer Surplus

Our goal is to always maximize economic surplus. Economic surplus is always maximized at the market equilibrium, which we consider to be efficient.