PRODUCER AND CONSUMER SURPLUS Microeconomics Made Easy by William Yacovissi Mansfield University © William Yacovissi All Rights Reserved

MAXIMIZING BEHAVIOR l Bill Gates, the founder of Microsoft, is worth around $100 billion. With all the poor people in the world, isn’t it immoral that one person has so much. l The answer to this question is perhaps the most important question in economics.

MAXIMIZING BEHAVIOR l Most people would feel there is something wrong with few people having so much and so many people having so little. l Most economists would say the opposite. l Why the difference in opinion.

MAXIMIZING BEHAVIOR l The difference is due to the fact that most people will focus on the final result but the economist will focus on how the result came about. l How did Bill Gates get his $100 billion. l The answer is we gave it to him voluntarily. The question is why did we give him so much money.

MAXIMIZING BEHAVIOR l We gave this money to Bill Gates because he gave us products that have more value to us than he money we gave him. Otherwise why did we buy them. l It’s important to remember that the only legal way to accumulate wealth is to produce greater wealth for other people.

MAXIMIZING BEHAVIOR l Isn’t there some way to get people to engage in wealth creation without giving them an equivalent amount of wealth. l Many people have thought so and many have tried to devise such a society. Karl Marx thought so. The basic tenant of Communism is that each produces according to his ability and consumes according to his need.

MAXIMIZING BEHAVIOR l But alas, despite decades of trying, and numerous attempts and experiments, no one has succeeded in creating an alternative system of wealth creation that works. l In Russia today, per capita income is $4,200 compared to $33,900 in the USA. 40% of the people live below the poverty line compared to 12.7% in the USA. The poverty line defined as having enough income to meet the basic necessities of life. Also, the social system to help the poor is far superior in the USA than in Russia.

CONSUMER SURPLUS l Consumer surplus is defined as the benefit a person receives from buying a product. The benefit is the difference between the value of the product to us and the price we paid for it. l Presumable, all purchases generate consumer surplus. Otherwise, why did you buy the product.

CONSUMER SURPLUS l The diagram on page 135 illustrates consumer surplus. l An important idea here is that a demand curve measures the benefit of the good to the consumer. l So CS is the difference between the demand curve and the price of the product.

PRODUCER SURPLUS l So why does any producer sell you a product in the first place. Most of us understand that the sales price exceeds the cost of production, generating profit for the producer. l This profit is called Producer Surplus and is measured as shown on page 135.

EFFICIENCY AND EQUITY l So why do producers sell you a good for less that you are willing to pay for it. Because competition among producers forces them to do so. l So why do you buy goods for more than is costs to produce them. Because competition among consumers forces you to do so.

EFFICIENCY AND EQUITY l It is an important tenant of economics that competitive markets maximize consumer plus producer surplus, resulting in the most efficient allocation of productive resources and the maximum social welfare. l Be sure to read the section on property rights on page 132.