Introduction
to Economics:
Social Issues
and Economic
Thinking
Wendy A .
Stock
CHAPTER 4
CONSUMER SURPLUS,
PRODUCER SURPLUS, AND
ECONOMIC EFFICIENCY
Copyright © 2013 John Wiley & Sons, Inc. / Photo Credit: ©Krystian Kaczmarski/iStockphoto
PowerPoint
Prepared by
Z. Pan
AFTER STUDYING THIS CHAPTER, YOU
SHOULD BE ABLE TO:
 Describe consumer
surplus, producer
surplus, economic
surplus, and deadweight
loss
 Illustrate and compute
consumer surplus,
producer surplus, and
deadweight loss
 Describe how economic
surplus can represent
social welfare and
economic efficiency
Copyright © 2013 John Wiley & Sons, Inc.
 Assess the impact of
market interventions on
economic surplus and
social welfare
 Identify groups who
benefit and are hurt by
market interventions
2
CONSUMER SURPLUS
Consumer Surplus is the difference between
what someone is willing to pay for a good or
service and the price of the good or service.
It is the net benefit buyers get from buying a
good or service.
Copyright © 2013 John Wiley & Sons, Inc.
3
CONSUMER SURPLUS
Copyright © 2013 John Wiley & Sons, Inc.
4
PRODUCER SURPLUS
Producer Surplus is the difference between
the price at which a seller is willing and able
to sell a given good and the actual price
received for the good. It is the net benefit
sellers get from selling a good or service.
Copyright © 2013 John Wiley & Sons, Inc.
5
PRODUCER SURPLUS
Copyright © 2013 John Wiley & Sons, Inc.
6
ECONOMIC SURPLUS
Economic Surplus is the sum of consumer
surplus plus producer surplus.
ES = CS + PS
Copyright © 2013 John Wiley & Sons, Inc.
7
ECONOMIC SURPLUS
ES = CS + PS
Copyright © 2013 John Wiley & Sons, Inc.
8
DISEQUILIBRIUM AND INEFFICIENCY
 Deadweight Loss: the loss in economic surplus that results
from disequilibrium market outcomes.
Copyright © 2013 John Wiley & Sons, Inc.
9
PRICE CEILINGS
 Price Ceiling: An upper limit on the price of
a good or service. A price ceiling sets the
maximum amount that can be charged for a
good or service.
Examples: rent controls, electricity, natural
gas and executive pay caps.
Copyright © 2013 John Wiley & Sons, Inc.
10
IMPACT OF A PRICE CEILING
Copyright © 2013 John Wiley & Sons, Inc.
11
PRICE FLOORS
 Price Floor: A lower limit on the price of a
good or service. It sets the minimum amount
that can be charged for a good or service..
Examples: minimum wage, some
agricultural products.
Copyright © 2013 John Wiley & Sons, Inc.
12
IMPACT OF A PRICE FLOOR
Copyright © 2013 John Wiley & Sons, Inc.
13
QUOTAS
 Quota - A limit on the quantity of a good
that can be sold.
 Examples: import quota, sugar beets,
tobacco leaf, cotton
Copyright © 2013 John Wiley & Sons, Inc.
14
IMPACT OF A QUOTA
Copyright © 2013 John Wiley & Sons, Inc.
15
QUESTIONS/DISCUSSIONS
1. The online auction site eBay allows
buyers to enter a beginning bid on an
item and then automatically increment
their bids upward to some maximum bid
level. Sellers are allowed to enter a
minimum price that they will accept for
their items, called a reserve price, below
which the item will not be sold. Use the
concepts of producer and consumer
surplus to explain why this setup is
attractive to buyers and sellers.
Discussion: W hy does eBay promise that it will
not reveal the seller’s reserve price or the buyer’s
maximum bid to other users?
Copyright © 2013 John Wiley & Sons, Inc.
16
KEY CONCEPTS
• Consumer surplus
• Producer surplus
• Economic surplus
• Deadweight loss
• Price ceiling
• Price floor
• Quota
Copyright © 2013 John Wiley & Sons, Inc.
17