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EC120 (572)

Chapter 7 Consumer Surplus, Producer Surplus, and Total Surplus

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Wilfrid Laurier University

Keith Diaz Chapter 7: Consumers, Producers, and the efficiency of markets  Welfare economics: study of how the allocation of resources affects the economic well-being  Allocation of resources refers to - How much of each good is produced - Which producers produce it - Which consumers consume it Consumer Surplus  A buyer’s willingness to pay for a good is the maximum amount the buyer will pay for that good  Measures how much the buyer values the good  At any Q, the height of the demand curve is the willingness to pay of the marginal buyer: the buyer who would leave the market if P were any higher  The staircase graph shows how many buyers (4 steps means 4 buyers); but a real demand curve would take over 10000 buyers into account and hence the curve would be smoother and not stairs  Consumer surplus: amount a buyer is willing to pay minus the buyer actually pays  net benefit  CS = (value to buyers) – (amount paid by buyers)  WTP – P  Measures the benefit buyers receive from participating in the market  Total CS = the area under the demand curve above the price from 0 to Q  Two reasons for a change in CS 1. Fall in CS due to remaining buyers paying higher P  CS from A+B to just A (CS rises when P falls CS from A to A+B) 2. Fall in CS due to buyers leaving market as P rises  A + B + C to just A (CS rises when buyers enter as P falls  A to A+B+C )  In most markets, CS reflects economic well-being and can help policymakers who respect the preferences that drive buyer behaviour. (ex: not drug-addicts; they’re not really benefitting)  When a price ceiling is set below the PE, CS may increase OR decrease, as less Q is supplied  shortage Cost and the Supply Curve – Producer surplus  Cost is the value of everything a seller must give up (cost of resources to produce the good + value of time) to produce a good (opportunity cost)  measure of the willingness to sell  A seller will only produce and sell the good if the price exceeds his or her cost  PS = (amount received by sellers) – (cost to sellers)  P – cost  measures the benefit sellers receive from participating in the market  At each Q, the height of the supply curve is the cost of the marginal seller, the seller who would leave the market if the price were any lower  Producer surplus: the amount a seller is paid for a good minus the seller’s cost net benefit  Total PS = the area above the supply curve under the price, from 0 to Q  Two reasons for a change in PS
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