1. 5.1 – An Economic Application: Consumer Surplus and Producer Surplus

2. 5.1 – An Economic Application: Consumer Surplus and Producer Surplus Consumer surplus is the difference between the amount that consumers actually pay and the amount that they would have been willing to pay. If p = D(x) describes the demand function for a commodity, then the consumer surplus is defined for the point (Q, P) as:

3. 5.1 – An Economic Application: Consumer Surplus and Producer Surplus Producer surplus is the difference between the amount that a producer receives from the sale of a good and the lowest amount that producer is willing to accept for that good. If p = S(x) is the supply function for a commodity, then, the producer surplus is defined for the point (Q, P) as:

4. 5.1 – An Economic Application: Consumer Surplus and Producer Surplus The equilibrium point, (x E, p E ), is the point at which the supply and demand curves intersect. In a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers (at current price) will equal the quantity supplied by producers (at current price). The result is an economic equilibrium for price and quantity.

5. 5.1 – An Economic Application: Consumer Surplus and Producer Surplus The four basic laws of supply and demand are: If demand increases (demand curve shifts to the right) and supply remains unchanged, a shortage occurs, leading to a higher equilibrium price. If demand decreases (demand curve shifts to the left) and supply remains unchanged, a surplus occurs, leading to a lower equilibrium price. If demand remains unchanged and supply increases (supply curve shifts to the right), a surplus occurs, leading to a lower equilibrium price. If demand remains unchanged and supply decreases (supply curve shifts to the left), a shortage occurs, leading to a higher equilibrium price.

6. 5.1 – An Economic Application: Consumer Surplus and Producer Surplus consumer surplus producer surplus equilibrium point

7. 5.1 – An Economic Application: Consumer Surplus and Producer Surplus consumer surplus producer surplus equilibrium point