Consumer Surplus and Producer Surplus Chapter 6 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Consumer Surplus Benefit surplus Maximum willingness to pay (WTP) less than actual price paid PersonMax WTP Actual PriceCS Bob$13$8$5 Barb$12$8$4 Bill$11$8$3 Bart$10$8$2 Brent$9$8$1 Betty$8$8$0 6-2

Consumer Surplus D Price (Per Bag) P1P1 Q1Q1 Quantity (Bags) Consumer Surplus Equilibrium Price = $8 6-3

Producer Surplus Benefit surplus Actual price received more than minimum acceptable price (AP) PersonMin APActual PricePS Carlos$3$8$5 Courtney$4$8$4 Chuck$5$8$3 Cindy$6$8$2 Craig$7$8$1 Chad$8$8$0 6-4

Producer Surplus S Price (Per Bag) P1P1 Q1Q1 Quantity (Bags) Producer Surplus Equilibrium Price = $8 6-5

Efficiency Revisited Productive and allocative efficiency D S Price (Per Bag) P1P1 Q1Q1 Quantity (Bags) Consumer Surplus Producer Surplus Equilibrium Price = $8 6-6

Productive Efficiency Productive efficiency is a situation in which the economy could not produce any more of one good without sacrificing production of another good. The concept is illustrated on a production possibility frontier (PPF), where all points on the curve are points of productive efficiency. [1] An equilibrium may be productively efficient without being allocatively efficient— i.e. it may result in a distribution of goods where social welfare is not maximized.economyproduction possibility frontier [1]allocatively efficientsocial welfare

Allocative Efficiency Allocative efficiency is a state of the economy in which production represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing. At the point of allocative efficiency, price is equal to marginal cost.

Productive and Allocative Efficiency

Are Price Controls Good or Bad? To be “efficient” a market must maximize consumers and producers surplus Q P D S PcPc QeQe CS PS 10 Copyright ACDC Leadership 2015

Are Price Controls Good or Bad? To be “efficient” a market must maximize consumers and producers surplus Price CEILING Q P D S PcPc QeQe Q ceiling DEAD WEIGHT LOSS The Lost CS and PS. INEFFICIENT! CS PS 11 Copyright ACDC Leadership 2015

Are Price Controls Good or Bad? To be “efficient” a market must maximize consumers and producers surplus Q P D S PcPc QeQe CS PS 12 Copyright ACDC Leadership 2015

Are Price Controls Good or Bad? To be “efficient” a market must maximize consumers and producers surplus Price FLOOR Q P D S PcPc QeQe Q floor DEAD WEIGHT LOSS INEFFICIENT! Not Maximizing CS and PS CS PS 13 Copyright ACDC Leadership 2015

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