Consumer and Producer Surplus

Joint Supply Where an increase/decrease in supply of one good leads to an increase/decrease in supply of another Beef/hides, Lamb/wool, oil/fuels, milk/dairy products, cocoa/husks, etc.

Joint Supply Surplus S Oil S Petrol S1 15 10 6 5 D1 D D 100 150 80 95 Price Price S1 15 Surplus 10 6 The aim of these diagrams is to demonstrate the inter-relationship between the two goods in joint supply, in this example, oil. A rise in demand for oil would cause a shortage which drives up the price of oil. This is a signal to oil producers to increase output of oil – there is clearly a demand for oil highlighted by the rising price. As QUANTITY SUPPLIED of oil increases it will mean that the amount of petrol on the market would also rise causing a shift in the supply curve of petrol to the right. This creates a surplus of petrol and prices would fall. This slide has been set to an automatic timer mode at a medium speed – the slide can be downloaded and the timing changed to utilise the mouse click if desired. Please note copyright details however when downloading slides! 5 D1 D D 100 150 80 95 120 Quantity bought and sold Quantity bought and sold

Composite Demand Where goods have more than one use – an increase in the demand for one leads to a fall in supply of the other Milk – used for cheese, yoghurts, cream, butter, etc. If more milk is used for cheese, ceteris paribus there is less available for butter

Composite Demand S1 S Milk S Cheese 20 9 10 6 Shortage D1 D D 100 130 Price Price 20 9 10 6 Shortage D1 D D 100 130 20 50 80 Quantity bought and sold Quantity bought and sold

Derived Demand Where the demand for one good is dependent on the demand for another related good Construction industry – demand for new office construction – demand for office space Demand for construction workers – demand for construction work Factor markets – derived demand

Derived Demand Shortage Wage Rate (£ per hour) S Plasterers Price S Houses 20 200 Shortage 12 180 D1 This slide shows the relationship between the demand for houses and the demand for plasterers. An increase in the demand for houses would imply an increase in the quantity supplied of houses – this in turn suggests that more plasterers would be needed. The supply of plasterers has been drawn deliberately inelastic – draw this to the attention of the students – the current debate about the shortage of plumbers is pertinent here! – the shortage in the number of plasterers compared to the demand for them drives up their wage rate to £20 per hour. Note the increase in the number hired is only relatively small because it takes time to train new plasterers. Those who are now tempted back into the market as the wage rate rise s may not have felt the wage before this was worth it and so were doing some other form of work. D1 D D 100 130 80 90 120 Quantity bought and sold Quantity hired

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

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

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

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