Consumer and Producer Surplus

Consumer and Producer Surplus

How is allocative efficiency expressed?

"to distribute to the market in such at manner that society's wants and needs are fully satified"

Allocatively efficient quantities therefore are "SOCIALLY OPTIMAL" - they optimize (maximize) the needs of both producers and consumers in that market

The most popular expression of allocative efficiency in a market is the point of EQUILIBRIUM. (Qd = Qs). There is no waste.

BUT, we can express allocative efficiency another way as well.....

Consumer and Producer Surplus

Producer's Goal = Consumer's Goal =

Maximize PROFITS

Maximize VALUE and UTILITY (satisfaction)

*When fully maximized, society's wants and needs in the market are met and we are a socially optimal or allocative efficient levels

*We quantify the amount of each goal in dollars and express it as a "surplus" for the groups (producers and consumers)

*We can see the entire TOTAL SURPLUS by adding up the total CONSUMER SURPLUS and PRODUCER SURPLUS in the market

CONSUMER + PRODUCER SURPLUS = TOTAL MARKET SURPLUS

Consumer Surplus (CS)

Money difference between the highest price a consumer is willing to pay minus the market price they actually pay

CS

Producer Surplus (PS)

Money difference between the the market price they actually sell it for minus the lowest price they are willing to sell it for

TS

PS

(Where is total surplus?)

Caluclating Surplus

If a triangle, it is the area of the triangle.

CS = 1/2 B x H

$1500

($6-$3) x 500 units / 2 = ???

$750

CS = 1/2 B x H

($3-$0) x 500 units / 2 = ???

Total Surplus??

How Market Efficiency is changed by Market Fluctuations

SHIFTS in Demand or Supply

A SHIFT in either supply or demand KEEPS the market socially optimal (allocatively efficient) because it remains in equilibrium. The equilibrium price and output are just readjusted.

S2

P2

Q2

P1

CS

PS

Q1

PRICE CHANGES

A PRICE CHANGE such as a government Price Floor or Ceiling leads to a market in DISEQUILIBRIUM and is NOT SOCIALLY OPTIMAL because a DWL exists in the market preventing total surplus from being maximized.

Qs

Qd

Pc

DWL

P1

CS

PS

Q1

PRICE CHANGES

IF a Deadweight Loss exists in a market:

1. Market is NOT Allocatively Efficient

P1

2. Total Surplus $ is not maximized

DWL

P2

CS

PS

DWL

Qs

Q1

Qd

PRACTICE

DWL

CS=$1250

PS = $11,250

(30-$25) x 500 / 2

(25-$5) x 500 =$10,000

($5-$0) x 500 / 2 = $1250

Assume the government imposes a price floor of $25 / lb for beef to protect cattle ranchers and farmers.

$20

1000

1500

500

$25

$30

1. Identify the areas of CS, PS, & DWL

2. Calculate the total $$ of CS & PS after the price floor added

TR = $12,500

3. Calculate the minimum TR for the cattle ranchers / farmers after the price floor is imposed

$5

Impact of Relative Elasticity

CS

INCREASES!

EXPLAIN WHY

If a good becomes more inelastic in supply or demand, does that help or hurt that group's surplus?

CS

P1

PS

Q1

Impact of Relative Elasticity

If a good becomes more elastic in supply or demand, does that + or - that group's surplus?

CS

P1

PS

DECREASES!

EXPLAIN WHY

Q1

Impact of Perfect Elasticity

If a good becomes perfectly elastic in supply or demand, what is the surplus equal to?

P1

PS

ZERO $0.00

Q1

Impact of Perfect Elasticity

If a good becomes perfectly inelastic in supply or demand, what is the surplus equal to?

CS

P1

PS

INFINITE $ dollars

Q1

Tariffs and Quotas

($55-$30)x50 / 2 = $625

CS

PS

($30-$5)x50 / 2 = $625

Orig CS

Orig PS

TS

$625 + $625 = $1250

($55-$10)x90 / 2 = $2025

CS

PS

($10-$5)x10 / 2 = $25

New CS

TS

$2025 + $25 = $2050

Pw

New PS

Quota @ 40 units

CS

($55-$20)x70 / 2 = $1225

PS

($20-$5)x30 / 2 = $225

New CS

TS

$1225 + $225 = $1450

Pw

New PS

40 units imported

Tariff added@ $10/unit

CS

($55-$20)x70 / 2 = $1225

PS

($20-$5)x30 / 2 = $225

New CS

Subtitle

TS

$1225 + $225 = $1450

Pw + tar

Tariff revenue Collected

New PS

($20-$10) x (70-30 units) = $400

Tariff revenue Collected

40units imported

DWL