Consumer Surplus

1
Consumer Surplus

• Consumer surplus is the difference between the
  amount consumers are willing to pay and the
  amount they have to pay for a good.

• Lower market prices will increase consumer
  surplus.

Consumer Surplus - the area below the demand
curve but above the actual price paid.
2
Consumer Surplus
Price(monthly bill)

• Lets consider the market for cellular phones.
  We will assume the market price is
  100.

140

• If the market price is 100, then the 25th
  unit will not sell because those who demand it
  are only willing to pay 60 for cellular
  phone service.

120
100
80

• At 100, the 15th unit will sell because
  those who demand it are willing to pay up to
  100 for cellular phone service.

60

• At 100, the 10th unit will sell because
  those who demand it are willing to pay up to
  120 for cellular phone service.

10
15
5
20
25
30
Quantity(of Cell Phone Subscribers)
3
Consumer Surplus
Price(monthly bill)
140

• For all those goods under 15 units, people
  are willing to pay more than 100 for service.

120

• The area, represented by the distance above
  the actual price paid and below the demand
  curve, is called consumer surplus.

100
80

• This area represents the net gains to buyers
  from market exchange.

60
10
15
5
20
25
30
Quantity(of Cell Phone Subscribers)
4
Producer Surplus
Price(monthly bill)

• Producer surplus is the difference between the
  price at which the seller is willing to sell the
  good, and the actual price paid.

Supply
140
120

• If the market price is 100, then the 25th
  unit will not be produced because the cost of
  supplying it exceeds the market price of
  140.

100
80

• At 100, the 15th unit will be produced
  because those who supply it are willing to do
  so for for at least 100.

60

• At 100, the 10th unit will be produced
  because those who supply it are willing to do
  so for at least 80.

10
15
5
20
25
30
Quantity(of Cell Phone Subscribers)
5
Producer Surplus
Price(monthly bill)
Supply
140

• For market outputs of less then 15 units,
  producers are willing to supply the good for
  100.

120

• The area represented by the distance above
  the supply curve but below the actual sales
  price is called producer surplus.

100

• This area is the difference between the
  minimum amount required to induce producers to
  supply a good and the amount they actually
  receive.

80
60
10
15
5
20
25
30
Quantity(of Cell Phone Subscribers)
6
Tariffs

• Collect a tax on imported good or service

• Why have them?

• To protect certain industries

• Retaliation on restrictions to our trade imposed
  by
• other countries

• Raise Government revenues

• Lousy politics?

7
Historical Background
U.S.
Average Tariff
60
?
4
?
1930
1996
8
Who gains and loses with a tariff?
1. Small Countries - have no effect on the world
price
2. Large Countries - have an effect on world
prices
9
Norway (price taker)
Ad valorem tariff - of estimated market value
World
Pd
Pw
10
Norway (price taker) - Consumer side
S
change in Consumer Surplus
P
2000
D
Qcomputers
11
Norway (price taker)
Gains/Losses
S
Consumers
-a -b -c -d
P
2000
D
Qcomputers
12
Norway (price taker) - Producer Side
S
P
2000
D
Qcomputers
13
Norway (price taker) - Producer Side
S
Gains/Losses
P
Producers
2000
a
a
D
Qcomputers
14
Norway (price taker)
Gains/Losses
S
Government
Earns importstariff
P
2000
c
D
Qcomputers
15
Ad valorem tariff - of estimated market value
Norway (price taker)
Total Gains and Losses
Consumers -a -b -c -d
Producers a
Government c
Pd
Pw
? Net -b -d
16
Deadweight Losses -b -d
b Over-production loss
b
d Consumption loss
Tariff
d