KRUGMAN'SMICROECONOMICS for AP*

Consumer and Producer Surplus

Margaret Ray and David Anderson

Micro:

Econ:

13

49

Module

What you will learnin this Module:

• The meaning of consumer surplus and its relationship to the demand curve.

• The meaning of producer surplus and its relationship to the supply curve.

Consumer Surplus

Consumer surplus measures the difference between what a consumer is willing to pay for a good and what he/she actually has to pay.

Willingness to Pay• Willingness to pay and the demand curve

• Willingness to pay and consumer surplus

• The difference between what the The difference between what the consumer is willing to pay and what consumer is willing to pay and what the consumer actually pays is the the consumer actually pays is the individual’s consumer surplus. It individual’s consumer surplus. It represents the net gain in happiness represents the net gain in happiness for the consumer. We measure it in for the consumer. We measure it in dollars and call it consumer surplus.dollars and call it consumer surplus.

Calculating Consumer Surplus

The area of the The area of the consumer surplus consumer surplus triangle will be ½ triangle will be ½ (base) (height).(base) (height).

Producer Surplus

Producer surplus measures the difference between the price producers receive for a good and the cost of producing the good.

Cost and Producer Surplus

• Cost and the supply curve

• Cost and producer surplus

Calculating Producer Surplus

The area of the The area of the consumer surplus consumer surplus triangle will be ½ triangle will be ½ (base) (height).(base) (height).

Changes in Price affect Consumer and Producer Surplus

• If price decreases, • Consumer surplus increases (willingness to

pay is the same, but the price paid is lower)• Producer surplus deceases (costs are the

same, but the price received is lower)

• If price increases, • Consumer surplus decreases (willingness to

pay is the same, but the price paid is higher)

• Producer surplus increases (costs are the same, but the price received is higher)

Total Surplus = Consumer Surplus + Producer Surplus

Figure 49.1 The Demand Curve for Used TextbooksRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

Table 49.1 Consumer Surplus When the Price of a Used Textbook Is $30Ray and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

Figure 49.2 Consumer Surplus in the Used-Textbook MarketRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

Figure 49.4 Consumer Surplus and a Fall in the Price of Used TextbooksRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

New New PricePrice

Figure 49.6 The Supply Curve for Used TextbooksRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

Table 49.2 Producer Surplus When the Price of a Used Textbook Is $30Ray and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

Figure 49.7 Producer Surplus in the Used-Textbook MarketRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

Figure 49.8 Producer SurplusRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

Figure 49.9 A Rise in the Price Increases Producer SurplusRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers