Consumer and Producer Surplus

1. Consumer and Producer Surplus Lecture 8

2. Assignment for Next Lecture • Do Homework 6 on ‘Homework Assignment’ due on Sunday, 11:55 PM • Read Chapter 7 • Topics Next Time • Making Decisions

3. In This Lecture • Consumer and Producer Surplus • Football Tickets • Continuous Demand and Supply • Deadweight Loss

4. Value of Ticket to Potential Demanders Peter $200 Paul $150 Mary $100 Jack $50 Jill $50 Value of Ticket to Potential Suppliers: Professor V $50 Professor W $50 Professor X $100 Professor Y $150 Professor Z $200 Price Peter Z 200 Paul Y 150 100 X Jack and Jill 50 V and W Tickets ND Football Tickets Mary 0 1 2 3 4 5

5. Equilibrium Price = $100 Peter, Paul and Mary buy tickets from Professors V, W and X. If they all trade at the equilibrium price, does it matter who buys from whom? No Gains: Peter = $200 - $100 = $100 Paul = $150 - $100 = $50 Mary = $100 - $100 = $0 V = $100 - $50 = $50 W = $100 - $50 = $50 X = $100 - $100 = $0 Total Gain: $250 Price Consumer Surplus Peter Z 200 Paul Y 150 100 X Jack and Jill 50 V and W Tickets Producer Surplus ND Football Tickets Mary 0 1 2 3 4 5

6. Price Consumer Surplus Maximum Willingness to Pay for Qo What is paid D Quantity Consumer Surplus Po Qo

7. Price New Consumer Surplus Original Consumer Surplus Loss in Surplus: Consumers paying more P1 Po Loss in Surplus: Consumers buying less D Qo Q1 Change in Consumer Surplus: Price Increase Quantity

8. Price Producer Surplus What is paid Minimum Amount Needed to Supply Qo Quantity Producer Surplus S Po Qo

9. Price Quantity Consumer and Producer Surplus S Consumer Surplus Po Producer Surplus D Qo

10. Price Deadweight Loss Lost Consumer Surplus New Consumer Surplus Lost Producer Surplus New Producer Surplus Quantity Loss in Efficiency Too High of Price (Price Floor) S PH Po D QL Qo

11. Price Deadweight Loss Lost Consumer Surplus New Consumer Surplus Lost Producer Surplus New Producer Surplus Quantity Loss in Efficiency Too Low of Price (Price Ceiling) S Po PL D QL Qo

12. STax Price Tax New Consumer Surplus Lost Consumer Surplus Deadweight Loss Tax Revenues Lost Producer Surplus New Producer Surplus Quantity Loss in Efficiency Taxation S PD Po PS D QL Qo

13. Size of Deadweight Loss • The deadweight loss of the tax will depend upon two factors: • The size of the tax • The reduction in the quantity sold • The reduction in the quantity sold will depend upon the elasticity of demand and supply • The more elastic demand or supply is the larger the deadweight loss will be • If either demand or supply is price inelastic then the deadweight loss will small and could be zero if perfectly inelastic (no change in the quantity sold and consumed)

14. SSub Subsidy Gain in Producer Surplus New Consumer Surplus Gain in Consumer Surplus Deadweight Loss New Producer Surplus Subsidy Cost Loss in Efficiency Subsidy Price S PS Po PD D Qo QH Quantity