1. Definition: the benefits from being able to purchase a good
Consumer Surplus 9/6/16
Definition: the benefits from being able to purchase a good
A. In other words: the difference between how
much you are willing/able to pay vs. how much
ACTUALLY paid
II. Example: buying used textbooks
Potential Buyers
Willingness to Pay
Aleisha
$59
Brad
$45
Claudia
$35
Darren
$25
Edwina
$10

2. Suppose books = $30
Aleisha’s net gain = $59-$30 = $29 (individ. consumer surplus)
Brad = $45-$30 = $15
Claudia = $35-$30 = $5
Total consumer surplus = = $49

3. B. Suppose books are now $20:
1. Calculate total consumer surplus:
The rule: As price falls, consumer surplus increases (the area under the curve and above the price increases)

4. C. Suppose price increases to $40. Calculate the consumer surplus.
The rule: As price rises, consumer surplus decreases.

5. Casey’s Willingness to Pay Josey’s Willingness to Pay
Quantity of Peppers
Casey’s Willingness to Pay
Josey’s Willingness to Pay
1st pepper
$0.90
$0.80
2nd pepper
0.70
0.60
3rd pepper
0.50
0.40
4th pepper
0.30
Consider the market for cheese-stuffed jalapeno peppers. Use the table:
a. to construct the demand schedules (each person’s) for
peppers for prices of $0.00, $0.10, and so on, and
b. to calculate the total consumer surplus when the
price of a pepper is $0.40.

6. Casey’s consumer surplus = 0.50 + 0.30 + 0.10
Price of pepper
Quantity demanded by Josey
Quantity demanded by Casey
Total quantity of peppers demanded
$0.90 1
0.80 2
0.70 3
0.60 4
0.50 5
0.40
0.30 8
0.20
0.10
0.00
Casey’s consumer surplus =
Josey’s consumer surplus =
$ $0.60 = $1.50

7. Another way to calculate consumer surplus: find area under the curve, but above the price (note: you cannot do this if you’re given specific individual data points!)

8. Warm-up: February 17, 2016 Below is Ari’s demand schedule for pasta.
Quantity of pasta
Willingness to pay 1
$10 2 8 3 6 4 5
Draw Ari’s demand curve for pasta. Shade in the area representing his consumer surplus when the price per serving is $4. (Look at the graph in your notes to help get started.)
At this price, how many servings will Ari buy? How much consumer surplus will he receive?
Suppose the price increases to $6. By how much does his consumer surplus decrease?
Suppose the restaurant is offering an “all you can eat” special for $25. How much will Ari eat, and what will his consumer surplus be?
Suppose you own the restaurant and Ari is a “typical” customer. What is the highest price you can charge for the special and still keep customers?

9. Warm-up: February 18, 2015
Homework problem #3.

10. Warm-up – Sept 23, 2014
Determine the amount of producer surplus generated in each of the following situations.
Gordon lists his old electric trains on eBay. He sets a minimum acceptable price (reserve price) of $75. After 5 days of bidding, the final high bid is exactly $75. He accepts the bid.
Susan advertises her car for sale in the newspaper for $2,000, but she is willing to sell the car for any price higher than $1,500. The best offer she gets is $1,200, which she declines.
Sanjay likes his job so much that he would be willing to do it for free. However, his annual salary is $80,000.

11. II. Example: selling used textbooks
Producer Surplus (2/17/15)
Definition: benefits that sellers receive – or the difference between the lowest price willing to sell for vs. ACTUAL selling price
II. Example: selling used textbooks
Potential sellers
Seller’s cost
Andrew $5
Betty
$15
Carlos
$25
Donna
$35
Engelbert
$45

12. Suppose price of book = $30
Andrew’s net gain: $30-$5 = $25 (individ. prod. surplus)
Betty: $30-$15 = $15
Carlos: $30-$25 = $5
Total producer surplus = $ = $45
Another way to calculate producer surplus: find area above the curve but below price

13. B. Suppose books are now $40. Calculate the producer surplus.
The rules: A rise in price causes an increase in producer surplus. A fall in price causes a decrease in producer surplus.

14. Shade in the regions that represent CS and PS.
Graph the following supply and demand schedules. PLOT EACH POINT
Price of book
Quantity demanded
Quantity supplied
$60 30 65 27 3 70 25 7 75 20 80 17 8 85 15 90 12 16 95 9
100 29
105 2 31
110 34
Shade in the regions that represent CS and PS.
Calculate CS and PS.
Now the second edition of the book comes out, and the willingness of each buyer to pay for the old version falls by $20.
In a table, show a new demand schedule and calculate CS and PS at the new equilibrium.

15. a. construct the supply schedule for peppers for prices of
Quantity of peppers
Cara’s cost
Jamie’s cost
1st pepper
$0.10
$0.30
2nd pepper
0.10
0.50
3rd pepper
0.40
0.70
4th pepper
0.60
0.90
Consider the market for cheese-stuffed jalapeno peppers. Use the table to:
a. construct the supply schedule for peppers for prices of
$0.00, $0.10, and so on, and
b. calculate the total producer surplus when the price of a
pepper is $0.70

16. Cara’s producer surplus = 0.10+0.30+0.60+0.60 = $1.60
Price of peppers
Quantity of peppers supplied
Quantity supplied by Cara
Quantity supplied by Jamie
$0.90 8 4
0.80 7 3
0.70
0.60 6 2
0.50 5
0.40 1
0.30
0.20
0.10
0.00
Cara’s producer surplus = = $1.60
Jamie’s producer surplus = = 0.60
Total producer surplus = $ = $2.20

17. Gains from trade
A. Markets generally make society as well-off as
possible given the available resources
B. Total surplus: sum of producer and consumer
surplus

18. Why market equilibrium = max total surplus
Those that value product most will get it
Those who most value the right to sell product will sell it (they have lowest cost)
Every consumer values the product more than seller – mutually beneficial transactions
If government intervenes  less efficiency  decrease in total surplus

19. Warm-up: February 18, 2016
In your notebook, draw 4 diagrams that represent the market for books. For each situation, apply the correct shift in supply or demand, and analyze what happens to consumer and producer surplus.
The cost of paper has increased.
Kindles and audio books have become more popular.
Printing presses have become much more efficient in production.
Incomes have increased (books are a normal good).

20. 1. Suppose consumer income increases
1. Suppose consumer income increases. If iPods are a normal good, the equilibrium price of an iPod will _________, and producer surplus in the iPod market will __________.
A) decrease, increase
B) increase, increase
C) decrease, decrease
D) increase, decrease
E) increase, not change
2. The figure to the right shows Clara’s demand for
CDs. If the market price for a CD is $10, then
Clara
A) receives a total of $10 of consumer surplus
B) receives a total of $80 of consumer surplus
C) receives a total of $60 of consumer surplus
D) will buy no CDs
E) receives no consumer surplus on the 8th CD
she buys

21. Increases and decreases in surplus
(For each, draw a diagram)
A. Income increases (normal good)
Effect on CS? PS?
B. Cost of production decreases
C. Personal income taxes increase
D. Corporate (business) taxes increase