Consumer and Producer Surplus Lecture 8

Assignment for Next Lecture Do Homework 6 on ‘Homework Assignment’ due on Sunday, 11:55 PM Read Chapter 7 Topics Next Time –Making Decisions

In This Lecture Consumer and Producer Surplus –Football Tickets –Continuous Demand and Supply Deadweight Loss

ND Football Tickets Value of Ticket to Potential Demanders Peter$200 Paul$150 Mary$100 Jack$50 Jill$50 Value of Ticket to Potential Suppliers: Professor V$50 Professor W$50 Professor X$100 Professor Y$150 Professor Z$ Price Tickets Mary Peter Paul Jack and JillV and W X Y Z

ND Football Tickets Equilibrium Price = $100 Peter, Paul and Mary buy tickets from Professors V, W and X. If they all trade at the equilibrium price, does it matter who buys from whom? No Gains: Peter= $200 - $100 = $100 Paul= $150 - $100 = $50 Mary= $100 - $100 = $0 V= $100 - $50 = $50 W= $100 - $50 = $50 X= $100 - $100 = $0 Total Gain: $ Price Tickets Mary Peter Paul Jack and JillV and W X Y Z Consumer Surplus Producer Surplus

Consumer Surplus Price Quantity D PoPo QoQo Maximum Willingness to Pay for Q o What is paid Consumer Surplus

Original Consumer Surplus Change in Consumer Surplus: Price Increase Quantity New Consumer Surplus Loss in Surplus: Consumers paying more Loss in Surplus: Consumers buying less Price D PoPo QoQo P1P1 Q1Q1

Minimum Amount Needed to Supply Q o Producer Surplus Price Quantity PoPo QoQo What is paid Producer Surplus S

Consumer and Producer Surplus Price Quantity PoPo QoQo S Producer Surplus Consumer Surplus D

Loss in Efficiency Too High of Price (Price Floor) Price Quantity PoPo QoQo S D QLQL New Consumer Surplus PHPH New Producer Surplus Lost Consumer Surplus Lost Producer Surplus Deadweight Loss

New Producer Surplus New Consumer Surplus Loss in Efficiency Too Low of Price (Price Ceiling) Price Quantity PoPo QoQo S D QLQL PLPL Lost Consumer Surplus Lost Producer Surplus Deadweight Loss

New Producer Surplus Tax Revenues New Consumer Surplus Loss in Efficiency Taxation Price Quantity PoPo QoQo S D QLQL PSPS Lost Producer Surplus PDPD S Tax Lost Consumer Surplus Deadweight Loss Tax

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 PoPo QoQo S D QHQH PDPD Subsidy Cost PSPS S Sub Subsidy New Producer Surplus Gain in Producer Surplus New Consumer Surplus Gain in Consumer Surplus Price Quantity Deadweight Loss