Surplus Macroeconomics All text in these slides is taken from https://courses.lumenlearning.com/waymakermacroxmasterfall2016/ where it is published under one or more open licenses. All images in these slides are attributed in the notes of the slide on which they appear and licensed as indicated. Cover Image: Untitled Author: Gustavo Quepon Source: https://unsplash.com/photos/pF_2lrjWiJE

Consumer and Producer Surplus Graphed

Consumer and Producer Surplus Definitions Consumer surplus is the gap between the price that consumers are willing to pay, based on their preferences, and the market equilibrium price. Producer surplus is the gap between the price for which producers are willing to sell a product, based on their costs, and the market equilibrium price. 

Social Surplus The sum of consumer surplus and producer surplus is social surplus, also referred to as economic surplus or total surplus. In Figure 1, social surplus would be shown as the area F + G. Social surplus is larger at equilibrium quantity and price than it would be at any other quantity This demonstrates the economic efficiency of the market equilibrium At the efficient level of output, it is impossible to produce greater consumer surplus without reducing producer surplus, and it is impossible to produce greater producer surplus without reducing consumer surplus

Consumer and Producer Surplus for Linear Supply and Demand Curves Principles of Microeconomics Chapter 3.5. Authored by: OpenStax College. Located at: http://cnx.org/contents/ea2f225e-6063-41ca-bcd8-36482e15ef65@10.31:24/Microeconomics. License: CC BY: Attribution. License Terms: Download for free at http://cnx.org/content/col11627/latest

Area of a Triangle Principles of Microeconomics Chapter 3.5. Authored by: OpenStax College. Located at: http://cnx.org/contents/ea2f225e-6063-41ca-bcd8-36482e15ef65@10.31:24/Microeconomics. License: CC BY: Attribution. License Terms: Download for free at http://cnx.org/content/col11627/latest

How to Calculate Consumer Surplus for Linear Supply and Demand Curves Step 1 Define the base and height of the consumer surplus triangle Step 2 Apply the values for base and height to the formula for the area of a triangle

Price Controls are Inefficient and Reduce Social Surplus Principles of Microeconomics Chapter 3.5. Authored by: OpenStax College. Provided by: Rice University. Located at: http://cnx.org/contents/ea2f225e-6063-41ca-bcd8-36482e15ef65@10.31:24/Microeconomics. License: CC BY: Attribution. License Terms: Download for free at http://cnx.org/content/col11627/latest

Deadweight Loss A price floor transfers more of the surplus to producers, but the gain to producers is less than the loss to consumers A price ceiling transfers more of the surplus to consumers, but the gain to consumers is less than the loss to producers Deadweight loss is loss in total surplus that occurs when the economy produces at an inefficient quantity

Practice Question If economists believe price controls are inefficient, why do they persist? Some consumers and producers are winners and they lobby to maintain them. They can also be popular if they are consistent with widely held normative beliefs, such as no one who works full time should live in poverty.

Quick Review What is consumer surplus and how is it calculated? What is producer surplus and how is it calculated? What is total (social) surplus and how is it calculated? How do the concepts of consumer, producer and total surplus explain why markets typically lead to efficient outcomes?