Microeconomics Third Edition

Chapter 4 Consumer and Producer Surplus

Copyright 2013 by Worth Publishers

Paul Krugman and Robin Wells

Figure 4.1 The Demand Curve for Used Textbooks Krugman and Wells: Microeconomics, Third Edition Copyright 2013 by Worth Publishers

Economic welfare and efficiency: Consumers and producers surplus 1. Consumers surplus = difference between

(i) the maximum amount a buyer is willing to pay for a good, and (ii) the amount the buyer actually pays

2. Consumer surplus is measured by the area under the demand curve that is above the price actually paid

-- e.g., area abc in the graph below Why? because Demand curve shows the maximum price the consumer would pay (= value to buyer), whereas price shows amount actually paid

Table 4.1 Consumer Surplus If Price of Used Textbook = $30 Krugman and Wells: Microeconomics, Third Edition Copyright 2013 by Worth Publishers

Figure 4.2 Consumer Surplus in the Used-Textbook Market Krugman and Wells: Microeconomics, Third Edition Copyright 2013 by Worth Publishers

Figure 4.3 Consumer Surplus Krugman and Wells: Microeconomics, Third Edition Copyright 2013 by Worth Publishers

Figure 4.4 Consumer Surplus and a Fall in the Price of Used Textbooks Krugman and Wells: Microeconomics, Third Edition Copyright 2013 by Worth Publishers

Figure 4.5 A Fall in the Price Increases Consumer Surplus Krugman and Wells: Microeconomics, Third Edition Copyright 2013 by Worth Publishers

1. Producers surplus = difference between (i) the minimum amount a seller buyer is willing to accept

for a good, and (ii) the amount the seller actually receives

2. Producer surplus is measured by the area above the supply curve that is below the price actually received -- e.g., area abc in the graph below

Why? because Supply curve shows the minimum price the producer would

accept (= value to seller), whereas price shows amount actually received

Figure 4.6 The Supply Curve for Used Textbooks Krugman and Wells: Microeconomics, Third Edition Copyright 2013 by Worth Publishers

Table 4.2 Producer Surplus When the Price of a Used Textbook = $30 Krugman and Wells: Microeconomics, Third Edition Copyright 2013 by Worth Publishers

Figure 4.7 Producer Surplus in the Used-Textbook Market Krugman and Wells: Microeconomics, Third Edition Copyright 2013 by Worth Publishers

Figure 4.8 Producer Surplus Krugman and Wells: Microeconomics, Third Edition Copyright 2013 by Worth Publishers

Figure 4.9 A Rise in the Price Increases Producer Surplus Krugman and Wells: Microeconomics, Third Edition Copyright 2013 by Worth Publishers

Key propositions about consumers and producers surplus 1. Efficient resource allocation maximizes total surplus (of producers and consumers combined) total surplus = value to buyers cost to sellers consumers surplus = value to buyers amount paid by buyers producers surplus = amount received by sellers cost to sellers but amount paid by buyers = amount received by sellers! so, consumer surplus + producer surplus = value to buyers cost to sellers

2. Key propositions about the efficiency of market equilibrium:

A. Goods go to buyers who value the product most highly (as measured by ability to pay) i.e., no demanders beyond E B. Goods are produced by sellers who can produce at lowest cost i.e., no production beyond E C. Equilibrium output maximizes the sum of consumer and producer surplus (= total surplus) i.e., production at any point other than

E yields less total surplus

Figure 4.11 Total Surplus Krugman and Wells: Microeconomics, Third Edition Copyright 2013 by Worth Publishers

Figure 4.12 Reallocating Consumption Lowers Consumer Surplus Krugman and Wells: Microeconomics, Third Edition Copyright 2013 by Worth Publishers

Figure 4.13 Reallocating Sales Lowers Producer Surplus Krugman and Wells: Microeconomics, Third Edition Copyright 2013 by Worth Publishers

Figure 4.14 Changing the Quantity Lowers Total Surplus Krugman and Wells: Microeconomics, Third Edition Copyright 2013 by Worth Publishers

Caveats and qualifications: Efficiency vs. equity: surplus is about only the former, not the latter maximizing efficiency means maximizing the total surplus: distribution of the total between consumers and producers is irrelevant to efficiency the above propositions take the distribution of income as given with a different distribution of income, there would be

different supply and demand curves a different equilibrium a different total surplus a different distribution of the total surplus between consumers and producers different sets of producers and consumers buying and selling different amounts of output

Slide Number 1Slide Number 2Slide Number 3Slide Number 4Slide Number 5Slide Number 6Slide Number 7Slide Number 8Slide Number 9Slide Number 10Slide Number 11Slide Number 12Slide Number 13Slide Number 14Slide Number 15Slide Number 16Slide Number 17Slide Number 18Slide Number 19Slide Number 20Slide Number 21