1. Consumer and Producer Surplus
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2. Consumer and Producer Surplus
On college campuses, both new and used textbooks are bought and sold by students and booksellers.
By examining consumer surplus and producer surplus we can quantify how much both buyers and sellers benefit from these transactions.

3. Willingness to Pay and the Demand Curve
A friendly reminder on what demand is
-A consumer’s willingness to pay for a good is the maximum price at which he or she would buy that good.

4. Willingness to Pay and the Demand Curve
Each step represents one consumer, and its height indicates that consumer’s willingness to pay, also shown on the demand schedule.
With only five potential consumers in this market, the demand curve is step-shaped.

5. Willingness to Pay and Consumer Surplus
Individual consumer surplus is the net gain to a single buyer from the purchase of a good. It equals the difference between the buyer’s willingness to pay and the price paid.

6. Willingness to Pay and Consumer Surplus
Total consumer surplus is the sum of all the buyer’s individual consumer surpluses in a market.
Individual consumer surplus is the difference between the buyer’s willingness to pay and the price paid.

7. Willingness to Pay and Consumer Surplus
At a price of $60, Ally, Bart, and Cierra get individual consumer surpluses equal to the difference between their willingness to pay and the price, illustrated by the areas of the shaded rectangles.
Both Darrius and Emma have a willingness to pay that is less than $60, so they are unwilling to buy a book in this market; they receive no consumer surplus.
The total consumer surplus is shown by the entire shaded area.

8. Willingness to Pay and Consumer Surplus
The term consumer surplus is often used to refer to both individual and total consumer surplus.
The total consumer surplus generated by purchases of a good at a given price is always equal to the area below the demand curve but above that price.

9. Willingness to Pay and Consumer Surplus
The consumer surplus at this price is equal to the shaded area: the area below the demand curve but above the price.
This is the total net gain to consumers generated from buying and consuming laptops when the price is $1,500.
So the total consumer surplus in this case is ½ × 1 million × $3,500 = $1.75 billion.
The area of a triangle is ½ × the base of the triangle × the height of the triangle.
The demand curve for laptop computers is smooth because there are many potential buyers.
At a price of $1,500, 1 million laptops are demanded.

10. Here is a silly example
Cookie Monster may be willing to pay $100 for one cookie.
But, Cookie Monster is happy to find out that the price of a cookie is just $1.
So Cookie Monster’s consumer surplus per cookie is $99!

11. Changing Prices and Consumer Surplus
Part two: the light blue area representing the increase in consumer surplus for
those who would not have bought a used textbook at the original price of $60 but who buy at the new price of $40—namely, Darrius’s increase in consumer surplus of $10.
Part one: the dark blue rectangle that represents the $20 increase in consumer surplus for each person who would have bought a used textbook at the original price of $60.
The total increase in consumer surplus is 3 × $20 + $10 = $70, represented by the sum of the shaded areas.
If price falls from $60 to $40, the increase in consumer surplus has two parts.

12. Producer Surplus and the Supply Curve
A seller’s cost is the lowest price at which they are willing to sell a good.
In the case of a student selling a used textbook after a course is over, that student/seller still bears an opportunity cost of selling the book.
For a manufacturer of textbooks, cost is easy to understand as the total cost of producing the book.

13. Cost
Each of the five students has one book to sell, and each has a different cost, as indicated in the supply schedule.
The supply curve illustrates sellers’ cost, the lowest price at which a potential seller is willing to sell the good, and the quantity supplied at that price.

14. Producer Surplus
Individual producer surplus is the net gain to an individual seller from selling a good—equal to price received minus cost.
Total producer surplus in a market is the sum of the individual producer surpluses of all the sellers.

15. Producer Surplus
Donna and Emir each have a cost that is greater than the price of $60, so they are unwilling to sell a book and so receive no producer surplus.
Andrew, Betty, and Carlos get individual producer surpluses equal to the difference between price and cost, illustrated here by the shaded rectangles.
At a price of $60, Andrew, Betty, and Carlos each sell a book but Donna and Emir do not.
The total producer surplus is given by the entire shaded area.

16. Producer Surplus
The producer surplus at this price equals the shaded area above the supply curve but below the price: ½ × 1 million × $4 = $2 million.
At a price of $5 per bushel, farmers supply 1 million bushels of wheat.

17. Producer Surplus
Economists use the term producer surplus to refer to both individual and total producer surplus.
Remember, the area on a graph that represents producer surplus is bounded by the supply curve, the price line, and the vertical axis.

18. Changing Prices and Producer Surplus
The change in total producer surplus is given by the sum of the shaded areas: the total area above the supply curve but between the old and new prices.
The triangular light red area represents the increase in producer surplus achieved by the farmers who supply the additional 500,000 bushels because of the higher price.
The dark red area represents the gain to the farmers who would have supplied 1 million bushels at the original price of $5.
A rise in the price of wheat from $5 to $7 leads to an increase in the quantity supplied and an increase in producer surplus.

19. Silly example part 2
Nabisco may be willing to sell their cookies for as low a $1 a pack
But, the are more then happy to sell them to cookie monster for $4 a pack
So Nabisco’s producer surplus is $3

20. So what does it look like all together
Price A C B D E
Consumer
surplus
Demand
Supply
Total
Surplus
Can you label:
Consumer surplus
- Producer surplus
Total surplus
Equilibrium
price
quantity
Producer
surplus
Quantity

21. Summary and Review
1) What is the maximum price at which a consumer would buy a good or service?
Willingness to pay.
2) How do you determine the individual consumer surplus?
Willingness to pay minus price actually paid.
3) How do you determine the total consumer surplus?
The sum of all individual consumer surpluses.

22. Summary and Review
4) On a graph with a demand curve, describe the area that represents total consumer surplus?
The area beneath the demand curve that is above the price.
5) What is the lowest price at which a seller is willing to sell a good?
Cost.
6) How do you determine the individual producer surplus?
Price received minus cost.

23. Summary and Review 7) How do you determine the total producer surplus?
The sum of all individual producer surpluses.
8) On a graph with a supply curve, describe the area that represents total consumer surplus?
The area above the supply curve that is below the price.

24. Walkthrough: Free-Response Question 1
1. Refer to the graph provided. a. Calculate consumer surplus. b. Calculate producer surplus. c. If supply increases, what will happen to consumer surplus? Explain. d. If demand decreases, what will happen to producer surplus? Explain. (6 points)
1 point: $4,000
1 point: Producer surplus will decrease.
1 point: $3,000
1 point: A decrease in demand decreases the equilibrium price, which causes producer surplus to decrease.
1 point: Consumer surplus will increase.
1 point: An increase in supply lowers the equilibrium price, which causes consumer surplus to increase.