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Lecture 6

MGEA02H3 Lecture Notes - Lecture 6: Economic SurplusPremium

Department
Economics for Management Studies
Course Code
MGEA02H3
Professor
Gordon Cleveland
Lecture
6

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MGEA02 – Lecture 6 – Consumer and Producer Surplus
Well-being can be measured as the sum of the consumer and producer surplus
oEx. If someone is offered a deal to have as many CD’s per year as he wants for a flat
fee of \$2,400 or to pay \$60 per CD, which deal will he take and how many CD’s will he
consume (no resales are possible)?
oFor \$60:
He would consume 40 CD’s
CS = \$800
oFor \$2,400:
He would consume 10 CD’s
CS = U(Q) – (P x Q)
= (100 x 100)/2 – 2400
= \$2,600
He will pick this option because it has a greater consumer surplus
Demand Curve for a Group of Individuals
Jane: q = 20 – 2P
John: q = 40 – 4P
Jack: q = 30 – 3P
Jill: q = 10 - P
Sum of these demands:
Q = 100 – 10P
All have a Y intercept of 10 so when added together the new curve should also have a Y
intercept of 10.

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