Consumer Surplus = price buyer would be willing to pay less market price.
Measures benefit to consumer of participating in a market
Producer Surplus = market price less cost to seller
Measures benefit to seller of participating in a market
Allocatively efficient level of output : level of output where total surplus (consumer + producer) is
To left of QE, value to buyer > cost to sellers
=> efficient to increase output
To right of QE, value to buyer < cost to sellers
=> efficient to reduce output
If outputs less than competitive output:
Value to buyer > Cost to seller
(consumer + producer surplus) = total surplus would increase if output were increased
Example (output < competitive output)
Value to buyer = $100
Cost to seller = $60
Total surplus would increase by $40 if output increased by one Question: How much, in total, would consumers and reducers pay to prevent this market from
Answer: Consumer Surplus + Producer Surplus = Total Surplus
Application / Review
Your brother gives you a "frequent flier" coupon, which allows you to pay $200 less than the
regular airfare on any flight you choose to take. The coupon can be used any time, and you often
fly. The cost of Toronto/Vancouver airfare is $500 for a regular ticket. You value the trip from
Toronto to Vancouver at $400. Should you use the coupon, pay $300, and fly to Vancouver?
Explain your answer.
Marginal Benefit of Trip: $400
Marginal Cost of Trip: $500
Why is marginal cost $500?
$200 coupon has an opportunity cost of $200, since it can be used in other flights
Result: Do NOT take trip
If coupon could only be sued on the Toronto/Vancouver trip, its opportunity cost would be zero and
you should take the trip
The government REMOVES a $10 sales tax that had been levied on sellers.
TRUE OR FALSE If the market price does not change, we can conclude that the supply curve is perfectly elastic.
Answer: False (Market price falls by $10)
If P0 unchanged, DD must be perfectly elastic
If Perfectly Elastic SS Market price falls by $10
True or False
If DD is perfectly elastic, and there is a reduction in supply, consumer surplus will fall.
If DD is perfectly elastic, consumer surplus is zero
If DD is perfectly elastic at price of $10, consumers would buy zero if the price were above $10.