Definition: the benefits from being able to purchase a good Consumer Surplus 9/6/16 Definition: the benefits from being able to purchase a good A. In other words: the difference between how much you are willing/able to pay vs. how much ACTUALLY paid II. Example: buying used textbooks Potential Buyers Willingness to Pay Aleisha $59 Brad $45 Claudia $35 Darren $25 Edwina $10

Suppose books = $30 Aleisha’s net gain = $59-$30 = $29 (individ. consumer surplus) Brad = $45-$30 = $15 Claudia = $35-$30 = $5 Total consumer surplus = 29+15+5 = $49

B. Suppose books are now $20: 1. Calculate total consumer surplus: The rule: As price falls, consumer surplus increases (the area under the curve and above the price increases)

C. Suppose price increases to $40. Calculate the consumer surplus. The rule: As price rises, consumer surplus decreases.

Casey’s Willingness to Pay Josey’s Willingness to Pay Quantity of Peppers Casey’s Willingness to Pay Josey’s Willingness to Pay 1st pepper $0.90 $0.80 2nd pepper 0.70 0.60 3rd pepper 0.50 0.40 4th pepper 0.30 Consider the market for cheese-stuffed jalapeno peppers. Use the table: a. to construct the demand schedules (each person’s) for peppers for prices of $0.00, $0.10, and so on, and b. to calculate the total consumer surplus when the price of a pepper is $0.40.

Casey’s consumer surplus = 0.50 + 0.30 + 0.10 Price of pepper Quantity demanded by Josey Quantity demanded by Casey Total quantity of peppers demanded $0.90 1 0.80 2 0.70 3 0.60 4 0.50 5 0.40 0.30 8 0.20 0.10 0.00 Casey’s consumer surplus = 0.50 + 0.30 + 0.10 Josey’s consumer surplus = 0.40 + 0.20 + 0 $0.90 + $0.60 = $1.50

Another way to calculate consumer surplus: find area under the curve, but above the price (note: you cannot do this if you’re given specific individual data points!)

Warm-up: February 17, 2016 Below is Ari’s demand schedule for pasta. Quantity of pasta Willingness to pay 1 $10 2 8 3 6 4 5 Draw Ari’s demand curve for pasta. Shade in the area representing his consumer surplus when the price per serving is $4. (Look at the graph in your notes to help get started.) At this price, how many servings will Ari buy? How much consumer surplus will he receive? Suppose the price increases to $6. By how much does his consumer surplus decrease? Suppose the restaurant is offering an “all you can eat” special for $25. How much will Ari eat, and what will his consumer surplus be? Suppose you own the restaurant and Ari is a “typical” customer. What is the highest price you can charge for the special and still keep customers?

Warm-up: February 18, 2015 Homework problem #3.

Warm-up – Sept 23, 2014 Determine the amount of producer surplus generated in each of the following situations. Gordon lists his old electric trains on eBay. He sets a minimum acceptable price (reserve price) of $75. After 5 days of bidding, the final high bid is exactly $75. He accepts the bid. Susan advertises her car for sale in the newspaper for $2,000, but she is willing to sell the car for any price higher than $1,500. The best offer she gets is $1,200, which she declines. Sanjay likes his job so much that he would be willing to do it for free. However, his annual salary is $80,000.

II. Example: selling used textbooks Producer Surplus (2/17/15) Definition: benefits that sellers receive – or the difference between the lowest price willing to sell for vs. ACTUAL selling price II. Example: selling used textbooks Potential sellers Seller’s cost Andrew $5 Betty $15 Carlos $25 Donna $35 Engelbert $45

Suppose price of book = $30 Andrew’s net gain: $30-$5 = $25 (individ. prod. surplus) Betty: $30-$15 = $15 Carlos: $30-$25 = $5 Total producer surplus = $25+15+5 = $45 Another way to calculate producer surplus: find area above the curve but below price

B. Suppose books are now $40. Calculate the producer surplus. The rules: A rise in price causes an increase in producer surplus. A fall in price causes a decrease in producer surplus.

Shade in the regions that represent CS and PS. Graph the following supply and demand schedules. PLOT EACH POINT Price of book Quantity demanded Quantity supplied $60 30 65 27 3 70 25 7 75 20 80 17 8 85 15 90 12 16 95 9 100 29 105 2 31 110 34 Shade in the regions that represent CS and PS. Calculate CS and PS. Now the second edition of the book comes out, and the willingness of each buyer to pay for the old version falls by $20. In a table, show a new demand schedule and calculate CS and PS at the new equilibrium.

a. construct the supply schedule for peppers for prices of Quantity of peppers Cara’s cost Jamie’s cost 1st pepper $0.10 $0.30 2nd pepper 0.10 0.50 3rd pepper 0.40 0.70 4th pepper 0.60 0.90 Consider the market for cheese-stuffed jalapeno peppers. Use the table to: a. construct the supply schedule for peppers for prices of $0.00, $0.10, and so on, and b. calculate the total producer surplus when the price of a pepper is $0.70

Cara’s producer surplus = 0.10+0.30+0.60+0.60 = $1.60 Price of peppers Quantity of peppers supplied Quantity supplied by Cara Quantity supplied by Jamie $0.90 8 4 0.80 7 3 0.70 0.60 6 2 0.50 5 0.40 1 0.30 0.20 0.10 0.00 Cara’s producer surplus = 0.10+0.30+0.60+0.60 = $1.60 Jamie’s producer surplus = 0.20+0.40 = 0.60 Total producer surplus = $1.60+0.60 = $2.20

Gains from trade A. Markets generally make society as well-off as possible given the available resources B. Total surplus: sum of producer and consumer surplus

Why market equilibrium = max total surplus Those that value product most will get it Those who most value the right to sell product will sell it (they have lowest cost) Every consumer values the product more than seller – mutually beneficial transactions If government intervenes  less efficiency  decrease in total surplus

Warm-up: February 18, 2016 In your notebook, draw 4 diagrams that represent the market for books. For each situation, apply the correct shift in supply or demand, and analyze what happens to consumer and producer surplus. The cost of paper has increased. Kindles and audio books have become more popular. Printing presses have become much more efficient in production. Incomes have increased (books are a normal good).

1. Suppose consumer income increases 1. Suppose consumer income increases. If iPods are a normal good, the equilibrium price of an iPod will _________, and producer surplus in the iPod market will __________. A) decrease, increase B) increase, increase C) decrease, decrease D) increase, decrease E) increase, not change 2. The figure to the right shows Clara’s demand for CDs. If the market price for a CD is $10, then Clara A) receives a total of $10 of consumer surplus B) receives a total of $80 of consumer surplus C) receives a total of $60 of consumer surplus D) will buy no CDs E) receives no consumer surplus on the 8th CD she buys

Increases and decreases in surplus (For each, draw a diagram) A. Income increases (normal good) Effect on CS? PS? B. Cost of production decreases C. Personal income taxes increase D. Corporate (business) taxes increase