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Consumer Surplus and Producer Surplus Chapter 6 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
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Consumer Surplus Benefit surplus Maximum willingness to pay (WTP) less than actual price paid PersonMax WTP Actual PriceCS Bob$13$8$5 Barb$12$8$4 Bill$11$8$3 Bart$10$8$2 Brent$9$8$1 Betty$8$8$0 6-2
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Consumer Surplus D Price (Per Bag) P1P1 Q1Q1 Quantity (Bags) Consumer Surplus Equilibrium Price = $8 6-3
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Producer Surplus Benefit surplus Actual price received more than minimum acceptable price (AP) PersonMin APActual PricePS Carlos$3$8$5 Courtney$4$8$4 Chuck$5$8$3 Cindy$6$8$2 Craig$7$8$1 Chad$8$8$0 6-4
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Producer Surplus S Price (Per Bag) P1P1 Q1Q1 Quantity (Bags) Producer Surplus Equilibrium Price = $8 6-5
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Efficiency Revisited Productive and allocative efficiency D S Price (Per Bag) P1P1 Q1Q1 Quantity (Bags) Consumer Surplus Producer Surplus Equilibrium Price = $8 6-6
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Productive Efficiency Productive efficiency is a situation in which the economy could not produce any more of one good without sacrificing production of another good. The concept is illustrated on a production possibility frontier (PPF), where all points on the curve are points of productive efficiency. [1] An equilibrium may be productively efficient without being allocatively efficient— i.e. it may result in a distribution of goods where social welfare is not maximized.economyproduction possibility frontier [1]allocatively efficientsocial welfare
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Allocative Efficiency Allocative efficiency is a state of the economy in which production represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing. At the point of allocative efficiency, price is equal to marginal cost.
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Productive and Allocative Efficiency
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Are Price Controls Good or Bad? To be “efficient” a market must maximize consumers and producers surplus Q P D S PcPc QeQe CS PS 10 Copyright ACDC Leadership 2015
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Are Price Controls Good or Bad? To be “efficient” a market must maximize consumers and producers surplus Price CEILING Q P D S PcPc QeQe Q ceiling DEAD WEIGHT LOSS The Lost CS and PS. INEFFICIENT! CS PS 11 Copyright ACDC Leadership 2015
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Are Price Controls Good or Bad? To be “efficient” a market must maximize consumers and producers surplus Q P D S PcPc QeQe CS PS 12 Copyright ACDC Leadership 2015
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Are Price Controls Good or Bad? To be “efficient” a market must maximize consumers and producers surplus Price FLOOR Q P D S PcPc QeQe Q floor DEAD WEIGHT LOSS INEFFICIENT! Not Maximizing CS and PS CS PS 13 Copyright ACDC Leadership 2015
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Copyright ACDC Leadership 2015 2010 Question 3
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Copyright ACDC Leadership 2015 2010 Question 4
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Copyright ACDC Leadership 2015 2012 Question 17
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