Consumer Surplus

Consumer Surplus • Consumer surplus is the extra value individuals receive from consuming a good over what they pay for it. • Alternatively, it is what people would be willing to pay for the right to consume a good at its current price.

FIGURE 9.1: Competitive Equilibrium and Consumer/Producer Surplus Price A S P* E D B 0 Q* Quantity per period

Producer Surplus • Producer surplus is the extra value producers get for a good in excess of the opportunity costs they incur for producing it. • It can also be defined as what all producers would pay for the right to sell a good at its current market price.

FIGURE 9.1: Competitive Equilibrium and Consumer/Producer Surplus Price A S P* E D B 0 Q* Quantity per period

A Numerical Example • The market equilibrium is P* = $6 and Q* = 4. • The equilibrium is shown as point E in Figure 9.3. • At point E consumers are spending $24 ($6·4).

A Numerical Example • At point E in Figure 9.3, consumer surplus is $8 (= ½·$4·4). • Producers also gain a producer surplus of $8 at point E. • Total consumer and producer surplus is $16. • If price stays at $6 but output falls to 3, total surplus falls to $15.

FIGURE 9.3: Efficiency in Tape Sales Price 10 S 6 E D 2 1 2 3 4 5 Tapes per period

Application 9.2: Rent Control • History of Rent Control • Controls were adopted in man U.S. and European cities in response to rapidly rising rents during World War II which continued after the war in several European countries and New York City. • Inflation of the 1970s resulted in several U.S. cities introducing more “flexible” rent controls • More than 10 percent of U.S. rentals are controlled.

Consumer Surplus