Consumer surplus and producer
surplus
• Consumer Surplus
is the difference in what consumers are
willing to pay for the price of the product
and what they are actually paying for it in
the market.
Price
Consumer
Surplus
S
$8
$7
$6
$5
D
90 100 110 120
Quantity
Demanded
Per Day
• Producer Surplus
is the difference in what suppliers are
willing to sell the product for and what they
are actually receiving for it in the market.
Price
S
Producer
Surplus
$5
$4
$3
$2
D
90 100 110 120
Quantity
Demanded
Per Day
Change in Consumer Surplus: Price
Increase
Price
New Consumer Surplus
Original Consumer
Surplus
Loss in Surplus: Consumers paying more
P1
Po
Loss in Surplus: Consumers buying
less
D
Q1
Qo
Quantity
Producer Surplus
Price
S
Producer Surplus
Po
What is paid
Minimum Amount Needed to
Supply Qo
Qo
Quantity
Consumer and Producer Surplus
Price
Consumer
Surplus
Po
S
Producer Surplus
D
Qo
Quantity
Loss in Efficiency
Too High of Price (Price Floor)
Price
Deadweight Loss
Lost Consumer
Surplus
New Consumer
Surplus
S
PH
Po
Lost Producer Surplus
New Producer
Surplus
D
QL
Qo
Quantity
Loss in Efficiency
Too Low of Price (Price Ceiling)
Price
Deadweight Loss
Lost Consumer
Surplus
S
New Consumer
Surplus
Po
Lost Producer Surplus
PL
New Producer
Surplus
D
QL
Qo
Quantity
Loss in Efficiency
Taxation
STax
Price
Tax
New Consumer
Surplus
S
Lost Consumer Surplus
Deadweight Loss
PD
Tax
Revenues
Po
Lost Producer Surplus
PS
New Producer
Surplus
D
QL
Qo
Quantity
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)
Loss in Efficiency
Subsidy
Price
S
Gain in Producer Surplus
New
Consumer
Surplus
Gain in Consumer
Surplus
PS
SSub
Subsidy
Po
PD
New Producer
Surplus
Deadweight Loss
D
Subsidy Cost
Qo
QH
Quantity