Paul Krugman and Robin Wells
Microeconomics
Third Edition
Chapter 4
Consumer and Producer Surplus
Copyright © 2013 by Worth Publishers
Figure 4.1 The Demand Curve for Used Textbooks
Krugman and Wells: Microeconomics, Third Edition
Copyright © 2013 by Worth Publishers
Economic welfare and efficiency: Consumers’ and producers’ surplus
1. Consumers’ surplus = difference between…
(i) the maximum amount a buyer is willing to pay for a good, and
(ii) the amount the buyer actually pays
2. Consumer surplus is measured by the area under the demand curve
that is above the price actually paid
-- e.g., area abc in the graph below
Why? because…
Demand curve shows the maximum price the consumer would pay
(= value to buyer), whereas price shows amount actually paid
Table 4.1 Consumer Surplus If Price of Used Textbook = $30
Krugman and Wells: Microeconomics, Third Edition
Copyright © 2013 by Worth Publishers
Figure 4.2 Consumer Surplus in the Used-Textbook Market
Krugman and Wells: Microeconomics, Third Edition
Copyright © 2013 by Worth Publishers
Figure 4.3 Consumer Surplus
Krugman and Wells: Microeconomics, Third Edition
Copyright © 2013 by Worth Publishers
Figure 4.4 Consumer Surplus and a Fall in the Price of Used Textbooks
Krugman and Wells: Microeconomics, Third Edition
Copyright © 2013 by Worth Publishers
Figure 4.5 A Fall in the Price Increases Consumer Surplus
Krugman and Wells: Microeconomics, Third Edition
Copyright © 2013 by Worth Publishers
1. Producers’ surplus = difference between…
(i) the minimum amount a seller buyer is willing to accept
for a good, and
(ii) the amount the seller actually receives
2. Producer surplus is measured by the area above the supply curve
that is below the price actually received
-- e.g., area abc in the graph below
Why? because…
Supply curve shows the minimum price the producer would
accept (= value to seller),
whereas price shows amount actually received
Figure 4.6 The Supply Curve for Used Textbooks
Krugman and Wells: Microeconomics, Third Edition
Copyright © 2013 by Worth Publishers
Table 4.2 Producer Surplus When the Price of a Used Textbook = $30
Krugman and Wells: Microeconomics, Third Edition
Copyright © 2013 by Worth Publishers
Figure 4.7 Producer Surplus in the Used-Textbook Market
Krugman and Wells: Microeconomics, Third Edition
Copyright © 2013 by Worth Publishers
Figure 4.8 Producer Surplus
Krugman and Wells: Microeconomics, Third Edition
Copyright © 2013 by Worth Publishers
Figure 4.9 A Rise in the Price Increases Producer Surplus
Krugman and Wells: Microeconomics, Third Edition
Copyright © 2013 by Worth Publishers
Key propositions about consumers’ and producers’ surplus
1. “Efficient” resource allocation maximizes total surplus
(of producers and consumers combined)
total surplus = value to buyers – cost to sellers
consumer’s surplus = value to buyers – amount paid by buyers
producer’s surplus = amount received by sellers – cost to sellers
but amount paid by buyers = amount received by sellers!
so, consumer surplus + producer surplus =
value to buyers – cost to sellers
2. Key propositions about the efficiency of market equilibrium:
A. Goods go to buyers who value the product most highly
(as measured by ability to pay) – i.e., no demanders beyond E
B. Goods are produced by sellers who can produce at
lowest cost – i.e., no production beyond E
C. Equilibrium output maximizes the sum of consumer and producer
surplus (= total surplus) – i.e., production at any point other than
E yields less total surplus
Figure 4.11 Total Surplus
Krugman and Wells: Microeconomics, Third Edition
Copyright © 2013 by Worth Publishers
Figure 4.12 Reallocating Consumption Lowers Consumer Surplus
Krugman and Wells: Microeconomics, Third Edition
Copyright © 2013 by Worth Publishers
Figure 4.13 Reallocating Sales Lowers Producer Surplus
Krugman and Wells: Microeconomics, Third Edition
Copyright © 2013 by Worth Publishers
Figure 4.14 Changing the Quantity Lowers Total Surplus
Krugman and Wells: Microeconomics, Third Edition
Copyright © 2013 by Worth Publishers
Caveats and qualifications:
“Efficiency” vs. “equity”: surplus is about only the former,
not the latter
maximizing “efficiency” means maximizing the total surplus:
distribution of the total between consumers and producers
is irrelevant to efficiency
the above propositions take the distribution of income as given
with a different distribution of income, there would be…
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•
•
•
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different supply and demand curves
a different equilibrium
a different total surplus
a different distribution of the total surplus
between consumers and producers
different sets of producers and consumers
buying and selling different amounts of output