1. Consumer and Producer Surplus
Lesson 7
Sections 49, 50, 51

2. Consumer Surplus and the Demand Curve
Willingness to Pay
The demand curve is based on the individual choices of the people that make it up, and each individual is willing to pay a different price.
While Consumer A might be willing to pay $500 for a new television, Consumer B might only pay $300.
If the Television costs $250, both will buy the television, but each will have a different level of benefit, called surplus. B would have a surplus of $50, while A would have a surplus of $250.

3. Figure The Demand Curve for Used Textbooks Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

4. Figure Consumer Surplus in the Used-Textbook Market Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

5. Figure Consumer Surplus Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

6. Figure The Supply Curve for Used Textbooks Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

7. Figure Producer Surplus in the Used-Textbook Market Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

8. Figure Producer Surplus Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

9. Consumer Surplus, Producer Surplus and Efficiency
The Gains from Trade
Both the buyer and the seller expect to gain from a trade, otherwise the trade would not happen.
The gains from trade are the consumer and producer surplus added together.
The Efficiency of Markets
The idea of the efficiency of markets is that no other combination of price and quantity will produce more consumer or producer surplus.
In other words, the market is efficient if there is no way to make someone better off without making someone else worse off.

10. Equity and Efficiency
Efficiency is not the only goal however, as society is also concerned with equity, or fairness.
Progressive Tax
Regressive Tax
Flat Tax

11. The Effects of Taxes on Total Surplus
The Effect of an Excise Tax on Quantity and Price

12. Price Elasticities and Tax Incidence

13. The Benefits and Costs of Taxation
Revenue from an Excise Tax
The revenue of the tax is the value of the tax times the quantity
Costs of Taxation
Deadweight Loss
Transactions that do not take place
Administrative Costs
Additional costs of having the tax
Opportunity Costs
Home improvements not made because of increasing tax burden

14. Utility as Satisfaction
Utility and Consumption
Utility is an imaginary measure of satisfaction.
Principle of Diminishing Marginal Utility
Marginal Utility
What is the satisfaction of consuming the next item?
Marginal Utility Curve

15. Figure Cassie’s Total Utility and Marginal Utility Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

16. Budgets and Optimal Consumption
Budget Constraints and Budget Lines
Budget Constraint
Consumption Possibilities
Budget Line
The Optimal Consumption Bundle

17. Figure Optimal Consumption Bundle Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers