Copyright 2006 – Biz/ed Consumer and Producer Surplus

Copyright 2006 – Biz/ed 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.

Copyright 2006 – Biz/ed Joint Supply Price Quantity bought and sold D S Oil D S Petrol D S Surplus

Copyright 2006 – Biz/ed 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

Copyright 2006 – Biz/ed Composite Demand Price Quantity bought and sold D S Milk D S Cheese D S1 20 Shortage 9 50

Copyright 2006 – Biz/ed 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

Copyright 2006 – Biz/ed Derived Demand Price (000s) Wage Rate (£ per hour) Quantity bought and sold Quantity hired D S Houses D S Plasterers D D1 120 Shortage 20 90

Copyright 2006 – Biz/ed 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

Copyright 2006 – Biz/ed Consumer Surplus Price (£) Quantity Demanded D = Marginal Utility 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 Total utility = value represented by blue and gold area Blue area is amount paid to acquire good. Gold area = total consumer surplus

Copyright 2006 – Biz/ed 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

Copyright 2006 – Biz/ed Producer Surplus Price (£) Quantity Supplied S Market price = £10 At £10, suppliers willing to offer 60 for sale Total Revenue = blue area £10 x 60 = £ Some suppliers would have offered 35 for sale at £6: Producer surplus = 35 x £4 = £140 Gold area = Producer surplus