1. Consumer Surplus (CS), Producer Surplus (PS), Total Surplus (TS), & Deadweight Loss (DWL)

2. Do You Know How to Calculate on a Graph …?
Consumer Surplus (CS)
Producer Surplus (PS)
Total Surplus (TS)
Deadweight Loss (DWL)

3. CS, PS, TS, & DWL $ Given the D & S curves in a market as shown, 12 108 6 4 2 D
200
400
600 Q

4. CS—The Benefits to Buyers (Equivalent to Bargain/Saving)$
CS is the shaded triangle. Its value equals the area of the triangle, or half or a rectangle. The formula is: area = base x ½ height. So CS = (300 x ½ x (12-6)) = $900. 12 10 S 8 6 4 2 D
200
400
600 Q

5. PS—The Benefits to Sellers (Equivalent to Gross Profit)$
PS is the shaded triangle. Its value equals the area of the triangle. So PS = base x ½ height = (300 x ½ x (6-2)) = $600. 12 10 S 8 6 4 2 D
200
400
600 Q

6. TS = CS + PS = Maximum (TS Is Maximized in a Free Market)$
In a free market, TS, the sum of CS and PS, measures the total maximum benefits to all market participants. TS = CS + PS = $900 + $600 = $1,500. 12 10 S 8 6 4 2 D
200
400
600 Q

7. DWL $
Given the D & S curves, suppose that the government imposed a per-unit tax (T) on the market as shown. What would happen? 12 10 S 8 6 4 2 D
200
400
600 Q

8. TS = CS + PS < Maximum (DWL Is the Loss/Reduction in TS)$
CS would decrease; PS would decrease; GTR would rises, TS would decrease; and a DWL would exist. 12
CS after tax 10 S 8
Government Tax Revenue (GTR)
DWL
GTR = $3 x 200 = $600; and DWL = ½ x 3 * 100 = $150 6
PS after tax 4 2 D
200
400
600 Q

9. Now You Know How to Calculate on a Graph …
Consumer Surplus (CS)
Producer Surplus (PS)
Total Surplus (TS)
Deadweight Loss (DWL)

10. See You!
Take Care!