Consumer and Producer Surplus Consumer and producer surplus are important concepts to use when discussing economic welfare. This presentation looks at each concept and their application to market conditions

Consumer and Producer Surplus Demand and Consumer Surplus Price per Pizza (£) Quantity of Pizzas Demanded (Qd) Assume the current market price is £3 per pizza – the consumer is prepared to buy 15 slices of pizza per week at this price Demand Market Price £3 15th

Consumer and Producer Surplus Demand and Consumer Surplus Price per Pizza (£) Quantity of Pizzas Demanded (Qd) Consumer would be willing to pay £6 for 5 slices of pizza – in fact the consumer only has to pay £3 for this pizza Demand Market Price 5th £6 £3 15th

Consumer and Producer Surplus Demand and Consumer Surplus Price per Pizza (£) Quantity of Pizzas Demanded (Qd) Consumer surplus is the difference between what the consumer is willing to pay and the price they actually do pay Demand Market Price 5th £6 £3 15th

Consumer and Producer Surplus Demand and Consumer Surplus Price per Pizza (£) Quantity of Pizzas Demanded (Qd) Demand Market Price 5th £6 £3 15th £ th

Consumer and Producer Surplus Total Expenditure and Consumer Surplus Price per Pizza (£) Quantity of Pizzas Demanded (Qd) Demand Market Price 5th £6 £3 15th £ th Total Spending = price per unit X Quantity consumed

Consumer and Producer Surplus Consumer Surplus at the Equilibrium Price Price per Unit (£) Quantity Market Demand Market Supply £ Total willingness to pay - actual amount paid

Consumer and Producer Surplus Consumer Surplus and Price Elasticity of Demand Price per Unit (£) Quantity Market Demand Market Supply £ Inelastic demand, consumers are insensitive to price

Consumer and Producer Surplus An Inelastic Demand – High Level of Consumer Surplus Price per Unit (£) Quantity Market Demand Market Supply £20 100

Consumer and Producer Surplus Elastic Demand – a Lower Willingness to Pay Price per Unit (£) Quantity Market Demand Market Supply £ Elastic demand – low level of consumer surplus

Consumer and Producer Surplus Consumer Surplus Consumer surplus  Is the difference between what consumers are willing to pay and what they actually have to pay at market prices  Represents the benefit to consumers of monetary exchange of goods and services Area of consumer surplus is shown by area above the market price and below the demand curve Consumers receive “surplus” when the marginal benefit of another unit of the good exceeds the price paid When demand is inelastic – producers may try to exploit consumer surplus by raising price and turning this into extra revenue

Consumer and Producer Surplus Producer Surplus Producer Surplus is the difference between what producers are willing to accept to produce a good and the price they actually receive in the market Producer surplus shown by the area above the market supply curve and below the market price Producer surplus is included when we measure economic welfare

Consumer and Producer Surplus Showing Producer Surplus Price per Unit (£) Quantity Market Demand Market Supply £ Price is £20 – but firms would be willing to supply some units at a lower price

Consumer and Producer Surplus Total Revenue (TR) = Price (P) x Quantity Supplied (Q) Price per Unit (£) Quantity Market Demand Market Supply £ Total revenue = £2000

Consumer and Producer Surplus Producer Surplus Price per Unit (£) Quantity Market Demand Market Supply £ Producer Surplus

Consumer and Producer Surplus Total Economic Welfare (Consumer + Producer Surplus) Price per Unit (£) Quantity Market Demand Market Supply £ Producer Surplus Consumer Surplus