Consumer and Producer Surplus
SECT. 9: CONSUMER CHOICE
Consumer and Producer Surplus
 Consumer Surplus
 Willingness to pay
Maximum price at which you would for a good, based on its utility,
is the willingness to pay.
 Knowing consumer surplus allows us to know how changes in price
affect the welfare of consumers

 Three types of Consumer Surplus:
 Individual Consumer Surplus


Total Consumer Surplus


The net gain EACH buyer achieves for themselves, from the
purchase of a good.
The sum of individual consumer surpluses by all buyers of a good
Price Changes and Consumer Surplus
Consumer and Producer Surplus
 Two types of Consumer Surplus:
 Individual Consumer Surplus


The net gain EACH buyer achieves for themselves, from the
purchase of a good.
Total Consumer Surplus

The sum of individual consumer surpluses by all buyers of a good
Consumer and Producer Surplus

Why a cost? OPPORTUNITY COST… the person selling a used
book, for example, will lose the book from their collection.


Krugman reminder: The true measure of “cost” is opportunity
cost, or choice.
Two types of Producer Surplus:
Individual Producer Surplus- The net gain each seller receives
from the sale of a good
 Total Producer Surplus- Total net gain to all sellers in the market.

Consumer and Producer Surplus
c. The term “consumer surplus” usually
applies to both, and is often used
interchangeably.
The total consumer surplus at a given
price is the area BELOW the demand
curve, but above the price
*The demand curve
is stepped, as there
are only a FEW
potential buyers!!!!
Figure 49.7 Producer Surplus in the Used-Textbook Market
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Consumer and Producer Surplus
Consumer and Producer Surplus
 Price Changes and Consumer Surplus
 Each price change (up or down), can lead to an increase, or
decrease in consumer surplus.

The quantity demanded of a product changes with price? Correct?
 This will affect consumer surplus (individual and total)
Consumer and Producer Surplus
Consumer and Producer Surplus
 Producer Surplus
 Cost and Producer Surplus

Cost- the LOWEST price at which a potential seller is willing to
sell.
Consumer and Producer Surplus
Why pay taxes?
Consumer and Producer Surplus
 Efficiency and Deadweight Loss
 In a market, there are gains to be made from trade.


Producers AND consumers benefit, and the efficiency of a market,
the point where no one can be made better off without
making others worse, is the reason why.
Efficiency

Can you improve on a market? Many have tried.
Consumer and Producer Surplus
 Reallocate
consumption?
 Reduces consumer surplus, takes items away from
someone how values them more, and gives them to
consumers who value these items less.
 Reallocate sales among sellers?
 Increases total cost and reduces producer surplus
 Changes in Quantity traded?
 Shortages and Surpluses!
Consumer and Producer Surplus

If market is at equilibrium, there is no way to increase gains
from trade!


HOWEVER…


Any other outcome reduces total surplus
Just because a market is efficient does not mean it is fair.
Equity

Also, markets sometimes fail, and fail to deliver efficiency. (no
longer maximizing total surplus)
Consumer and Producer Surplus
 Equity and Efficiency
 Society does care about what is fair, and markets can not
always fill this need.

MUST sacrifice efficiency for fairness in some cases.
 Taxes
 Progressive
 Regressive
 Proportional (flat)
 Excise (sales)
Consumer and Producer Surplus
 Excise Tax on Quantities and Prices
 Tax imposed on hotel owners
Consumer and Producer Surplus

Tax imposed on consumers.

Tax incidence- WHO really pays the tax? And how much?
Consumer and Producer Surplus
 Elasticity and effect on tax incidence
 When consumers pay most of the tax!
Consumer and Producer Surplus

When producers pay most of the tax!
Consumer and Producer Surplus
 Benefits of Taxation
 Revenue
(Tax per unit) X Qd= Tax Revenue
Consumer and Producer Surplus
 Costs of Taxation
 Deadweight Loss
Prevents mutually beneficial transactions…
 Like a quota, creates deadweight loss.

Consumer and Producer Surplus
 Other Specific Costs:
 Administrative- not shown in deadweight loss, but how much
does it cost to collect the tax, and pay for it?
 Alternatives?


Lump-sum tax example- Fair? (same for all)
 British poll taxes
 NO… unfair. BUT, incredibly efficient
Value Added Taxes (VAT)?

Some claim fair and efficient
EX: Carbon Taxes