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, 1155 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
ND Football Tickets

• 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

Mary
0 1 2 3
4 5
5
ND Football Tickets

• 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

Mary
0 1 2 3
4 5
6
Consumer Surplus
Po
Qo
7
Change in Consumer Surplus Price Increase
Quantity
8
Producer Surplus
S
Po
Qo
9
Consumer and Producer Surplus
S
Consumer Surplus
Po
Producer Surplus
D
Qo
10
Loss in Efficiency Too High of Price (Price
Floor)
S
PH
Po
D
Qo
QL
11
Loss in Efficiency Too Low of Price (Price
Ceiling)
S
Po
PL
D
Qo
QL
12
Loss in Efficiency Taxation
S
PD
Po
PS
D
Qo
QL
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
Loss in Efficiency Subsidy
Price
S
PS
Po
PD
D
Qo
QH
Quantity