1. Consumers’, Producers’ & Net Social Surplus Lecture 8
Dr. Jennifer P. Wissink
©2017 John M. Abowd and Jennifer P. Wissink, all rights reserved.
February 22, 2017

2. Sad News in the World of Economics
Kenneth Arrow, Nobel-Winning Economist Whose Influence Spanned Decades, Dies at 95
Kenneth J. Arrow, one of the most brilliant economic minds of the 20th century and, at 51, the youngest economist ever to win a Nobel, died on Tuesday at his home in Palo Alto, Calif. He was 95.

3. EPI of a Per Unit Commodity TaxPD
Price
tax
Supply PS
Demand
Quantity

4. Comments On Our Market Model So Far...
Demand and Supply
Equilibrium
Comparative Statics
Floors
Ceilings
Quotas
Taxes

5. Surplus Measures: Consumers’ & Producers’ & Net Social
Goal: to measure the gains from trade in $...
and more
Three concepts to introduce:
Consumers’ Surplus (CS)
Producers’ Surplus (PS)
Net Social Surplus (NSS)

6. This Old House Old address: 133 Tompkins St.
New address: 132 Tompkins St.
Problem: We bought the new house before selling the old one.
So... suppose...
Our minimum selling price = $55,000.
Potential buyer Abe: His maximum buying price = $45,000.
So, no deal with Abe.

7. Selling our OLD House Suppose, a potential (and last) buyer Betty.
Her maximum price = $95,000.
Remember: Our minimum selling price = $55,000.
Trade should occur!
Net social surplus on trade = $40,000
Division of surplus to the Wissink’s and to Betty depends on the strike price - what we sell the house for.
Suppose we sold it for $90,000.
HA!
Consumer’s surplus=$5,000
Producer’s surplus=$35,000.
What did we sell it for?
Don’t ask!

8. Demand Price, Marginal Benefit & Total Benefit
Suppose QD = 40 - P
Price 40
P*=17
Demand
Q*=23 40
Quantity

9. Consumers’ Surplus (CS) when QD=40-P  PD=40-P and P*=17 Q*=23
CS on 1st unit:
CS on 2nd unit:
CS on 23rd unit:
CS on Q*=23 units:
Price 40
P*=17
Demand
Q*=23 40
Quantity

10. i>clicker question
Suppose Frannie’s demand price (i.e. what she is willing to pay) is as follows: $3 for the first can of juice, $2 for the second, $1 for the third and $0.50 for the fourth. Suppose a can of juice sells for $ How much consumer’s surplus will Frannie get from her juice consumption?
A. $6.50
B. $6.00
C. $4.00
D. $3.75
E. $0

11. Supply Price, $Marginal Cost and $Variable Cost
Suppose QS = 6+P  PS = -6 + Q
Price
Supply
P*=17 6
Q*=23
Quantity

12. Producers’ Surplus (PS) when QS=6+P PS=-6+Q and P*=17 Q*=23
PS on 1st unit:
PS on 7th unit:
PS on 23rd unit:
PS on Q*=23 units:
Price
Supply
P*=17 6
Q*=23
Quantity

13. i>clicker question
Suppose Butch Sunkissed’s supply price for juice (i.e. what he is willing to sell for) is as follows: $0.25 for the first can of juice, $0.30 for the second, $0.60 for the third and $1.20 for the fourth. Suppose a can of juice sells for $ How much producer’s surplus will Butch get from his juice sales?
A. $0.05
B. $2.25
C. $1.15
D. $1.10
E. $0.65

14. Net Social Surplus (NSS) CS & PS
Market equilibrium: P* & Q* $
$CS = $TB - $TE
$TB = area OCAQ*
$TE = area OP*AQ*
$CS = area P*CA
$CS=area under demand and above price demanders pay C
Supply=MC
$PS = $TR - $VC
$TR = area OP*AQ*
$VC =area OEAQ*
$PS = area OP*AE
$PS=area under price suppliers receive and above supply A P*
Demand=MB O E Q*
Quantity
$NSS = $TB - $VC
$NSS = area OCAE
area between demand and supply

15. Reprise of Frannie & Butch from i>clicker Qs with P*=$0.75
Juice cans
$MBFran
$MCButch
Trade?
NSS CS PS
1st $3
$0.25
2nd $2
$0.30
3rd $1
$0.60
4th
$0.50
$1.20
On Total Traded

16. Market Equilibrium & Efficiency
Suppose that social and private valuations of marginal benefits and marginal costs equal each other.
Then at a market equilibrium, you get what economists call “efficiency”.
aka Pareto efficiency
aka allocative efficiency
That is, NSS is maximized at the market equilibrium.
GOOD NEWS result for markets!
Now, suppose “something” keeps us away from Q*.
The market is not efficient.
What is the “cost” of that?
Dead Weight Loss
Demand=MB
Supply=MC $
Quantity P* Q* A O E C

17. i>clicker question
Consider demand and supply in the market for unskilled labor. Suppose a binding minimum wage is imposed. Which one of the following is false when we compare the before and after situation?
Consumers’ Surplus under the minimum wage is lower.
Net Social Surplus under the minimum wage is higher.
There will be surplus labor under the minimum wage.
Producers’ Surplus may be higher or lower under the minimum wage.
$wage
Before
After
NSS CS PS S D
Labor

18. Why Commodity Taxes are Inefficient
Price
Supply
Demand
Quantity

19. Marshall’s Diamond Water Paradox - Resolved
$P diamonds
$P water
Q diamonds
Q water