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

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

CS, PS, TS, & DWL $ Given the D & S curves in a market as shown, 12 10 8 6 4 2 D 200 400 600 Q

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

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

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

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

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

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

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