Consumer and Producer Surplus Lesson 7 Sections 49, 50, 51

Consumer Surplus and the Demand Curve Willingness to Pay The demand curve is based on the individual choices of the people that make it up, and each individual is willing to pay a different price. While Consumer A might be willing to pay $500 for a new television, Consumer B might only pay $300. If the Television costs $250, both will buy the television, but each will have a different level of benefit, called surplus. B would have a surplus of $50, while A would have a surplus of $250.

Figure 49.1 The Demand Curve for Used Textbooks Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Figure 49.2 Consumer Surplus in the Used-Textbook Market Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Figure 49.3 Consumer Surplus Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Figure 49.6 The Supply Curve for Used Textbooks Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Figure 49.7 Producer Surplus in the Used-Textbook Market Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Figure 49.8 Producer Surplus Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Consumer Surplus, Producer Surplus and Efficiency The Gains from Trade Both the buyer and the seller expect to gain from a trade, otherwise the trade would not happen. The gains from trade are the consumer and producer surplus added together. The Efficiency of Markets The idea of the efficiency of markets is that no other combination of price and quantity will produce more consumer or producer surplus. In other words, the market is efficient if there is no way to make someone better off without making someone else worse off.

Equity and Efficiency Efficiency is not the only goal however, as society is also concerned with equity, or fairness. Progressive Tax Regressive Tax Flat Tax

The Effects of Taxes on Total Surplus The Effect of an Excise Tax on Quantity and Price

Price Elasticities and Tax Incidence

The Benefits and Costs of Taxation Revenue from an Excise Tax The revenue of the tax is the value of the tax times the quantity Costs of Taxation Deadweight Loss Transactions that do not take place Administrative Costs Additional costs of having the tax Opportunity Costs Home improvements not made because of increasing tax burden

Utility as Satisfaction Utility and Consumption Utility is an imaginary measure of satisfaction. Principle of Diminishing Marginal Utility Marginal Utility What is the satisfaction of consuming the next item? Marginal Utility Curve

Figure 51.1 Cassie’s Total Utility and Marginal Utility Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Budgets and Optimal Consumption Budget Constraints and Budget Lines Budget Constraint Consumption Possibilities Budget Line The Optimal Consumption Bundle

Figure 51.3 Optimal Consumption Bundle Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers