KW_Macro_Ch_05_Sec_02_Producer_Surplus_and_the_Supply_Curve

# KW_Macro_Ch_05_Sec_02_Producer_Surplus_and_the_Supply_Curve...

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>> Consumer and Producer Surplus Section 2: Producer Surplus and the Supply Curve chapter 5 Just as buyers of a good would have been willing to pay more for their purchase than the price they actually pay, sellers of a good would have been willing to sell it for less than the price they actually receive. We can therefore carry out an analysis of pro- ducer surplus and the supply curve that is almost exactly parallel to that of consumer surplus and the demand curve. Cost and Producer Surplus Consider a group of students who are potential sellers of used textbooks. Because they have different preferences, the various potential sellers differ in the price at which they are willing to sell their books. The table in Figure 5-6 shows the prices at which several different students would be willing to sell. Andrew is willing to sell the book as long as he can get anything more than \$5; Betty won’t sell unless she can get at least \$15; Carlos, unless he can get \$25; Donna, unless she can get \$35; Engelbert, unless he can get \$45.

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2 CHAPTER 5 SECTION 2: PRODUCER SURPLUS AND THE SUPPLY CURVE Figure 5-6 5 4 3 2 1 0 Engelbert S \$45 35 25 Price of book Quantity of books 5 15 Andrew Betty Carlos Donna Engelbert Cost Potential sellers \$5 15 25 35 45 Donna Carlos Betty Andrew The Supply Curve for Used Textbooks The supply curve illustrates sellers’ cost, the low- est price at which a potential seller is willing to sell the good, and the quantity supplied at that price. Each of the five students has one book to sell and each has a different cost, as indicated in the accompanying table. At a price of \$5 the quantity supplied is one (Andrew), at \$15 it is two (Andrew and Betty), and so on until you reach \$45, the price at which all five students are willing to sell.
The lowest price at which a potential seller is willing to sell has a special name in eco- nomics: it is called the seller’s cost . So Andrew’s cost is \$5, Betty’s is \$15, and so on. Using the term cost , which people normally associate with the monetary cost of producing a good, may sound a little strange when applied to sellers of used text- books. The students don’t have to manufacture the books, so it doesn’t cost the stu- dent who sells a book anything to make that book available for sale, does it? Yes, it does. A student who sells a book won’t have it later, as part of a personal collection. So there is an opportunity cost to selling a textbook, even if the owner has completed the course for which it was required. And remember that one of the basic principles of economics is that the true measure of the cost of doing anything is always its opportunity cost—the real cost of something is what you must give up to get it. So it is good economics to talk of the minimum price at which someone will sell a

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## This note was uploaded on 04/10/2008 for the course ECONOMICS 103 taught by Professor Sheflin during the Spring '08 term at Rutgers.

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KW_Macro_Ch_05_Sec_02_Producer_Surplus_and_the_Supply_Curve...

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