1. Consumer and Producer Surplus

2. Consumer Surplus
The difference between the price that a consumer is prepared to pay and the actual price paid
Related to the value we place on items
Linked to the degree of utility
Useful concept in analysing welfare gains and losses as a result of resource allocation
Emphasis on the MARKET demand – of those in the market there are some who are willing to pay higher prices than the market price

3. Consumer Surplus These 15 consumers get 15 x £4 of consumer surplus
Price (£)
Market Price = £5
20 consumers willing to pay £5
15 Consumers WILLING to pay £9
These 15 consumers get 15 x £4
of consumer surplus 9
Total utility = value represented by
blue and gold area 5
Blue area is amount paid to
acquire good. Gold area = total consumer surplus
D = Marginal Utility 15 20
Quantity Demanded

4. Producer Surplus
Difference between the market price received by the seller and the price they would have been prepared to supply at
Price received – linked to factor cost + element of normal profit
Producer surplus = abnormal profit

5. Producer Surplus Price (£) S 10 6 35 60 Quantity Supplied
Market price = £10
At £10, suppliers willing to offer
60 for sale 10
Total Revenue = blue area
£10 x 60 = £600 6
Some suppliers would have offered
35 for sale at £6:
Producer surplus = 35 x £4 = £140
Gold area = Producer surplus 35 60
Quantity Supplied

6. Consumer Surplus D Price Quantity Consumer Surplus
Maximum Willingness to Pay for Qo Po
What is paid Qo

7. Change in Consumer Surplus: Price IncreaseD Po Qo
New Consumer Surplus
Original Consumer Surplus
Loss in Surplus: Consumers paying more P1 Q1
Loss in Surplus: Consumers buying less
Quantity

8. Producer Surplus S Price Quantity Producer Surplus Po What is paid
Minimum Amount Needed to Supply Qo Qo

9. Consumer and Producer Surplus
Price
Quantity S
Consumer Surplus Po
Producer Surplus D Qo

10. Loss in Efficiency Too High of Price (Price Floor)
Quantity
Deadweight Loss
Lost Consumer Surplus S
New Consumer Surplus PH
New Producer Surplus Po
Lost Producer Surplus D QL Qo

11. Loss in Efficiency Too Low of Price (Price Ceiling)
Quantity
Deadweight Loss
Lost Consumer Surplus S
New Consumer Surplus Po
Lost Producer Surplus PL
New Producer Surplus D QL Qo

12. Loss in Efficiency Taxation
STax
Price
Quantity
Tax S
New Consumer Surplus
Lost Consumer Surplus
Deadweight Loss PD
Tax Revenues Po
Lost Producer Surplus PS
New Producer Surplus D QL Qo

13. 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)

14. Loss in Efficiency Subsidy
Price S
Gain in Producer Surplus
New Consumer Surplus
Subsidy PS
SSub
New Producer Surplus
Subsidy Cost Po
Gain in Consumer Surplus
Deadweight Loss PD D Qo QH
Quantity