College Textbook Market: On average, students spend $1,200 per semester An 82% rise in price from More than an 800% increase from 1978!!! So, what do college students do?

Consumer and Producer Surplus Understand and identify the associated benefits of consumer and producer surplus in the marketplace and be able to explain and illustrate market factors that increase/decrease consumer/producer benefits.

Willingness to Pay Let’s assume we are looking at a perfectly competitive market for used college textbooks (done to maximize consumer/producer surplus in high priced textbook market) The maximum price at which you were willing to buy that good or service is a person’s willingness to pay Those price points can be translated into a demand curve for the used textbook Let’s take a look…

The Demand Curve In the market for a used Macro textbook, this is what these 5 students are willing to pay for it (their willingness to pay)

Consumer Surplus Let’s assume the book is sold for $30… Surplus: the left over amount consumers have after making the transaction Price (willing to pay) − Price (paid) = individual consumer surplus Ex: Aleisha’s CS: $59 − $30 = $29 Can apply to the individual or to the entirety of the marketplace If we do this for every individual in the marketplace we can calculate the total consumer surplus The remaining money/opportunity still in possession of the consumer that can be utilized for other opportunities

Consumer Surplus The total consumer surplus is equal to $49 If the individuals were not willing to buy at $30 they have no consumer surplus

Consumer Surplus The total consumer surplus generated by purchases of a good at a given price is equal to the area below the demand curve but above the price (equilibrium price)

Change in Price and Consumer Surplus Let’s go back to the used textbook market… If the price decreases to $20, what is the result? Increase in total consumer surplus!!! Aleisha gains, Brad gains, Claudia gains, and Darren is now included Vice versa: increase in price would decrease CS!

Producer Surplus Used textbook market…lowest prices at which different students are willing to sell their used textbooks.

Producer Surplus These price points, willingness to sell, are all different because people’s opportunity costs are all different All associate a different value to their book Cost: the lowest price at which the seller is willing to sell their good/service Producer Surplus: gains made by the seller from making a transaction Price received − seller cost = producer surplus Let’s assume the market price for the textbook is $30 Ex. Andrew: $30 − $5 = $25 Andrew’s Producer Surplus

Producer Surplus Illustrated Total producer Surplus of $45 Donna and Engelbert are not included because their costs were greater than the market price, so they never made the transaction

Producer Surplus The total producer surplus from sales of a good at a given price is the area above the supply curve but below the market price. Rise in price will increase producer surplus The producers selling at the initial market price will now gain surplus and new sellers stand to gain a surplus for the first time Vice versa is also true

Total Surplus We can combine the CS and PS in order to get the total surplus (TS) in the market… The regular market forces we have learned about will impact CS and PS…