Competitive Markets: Applications1.Surplus maximization in competitive equilibriumi.Consumer surplusii.Producer surplusiii.Total surplusiv.Deadweight loss2.Excise Taxes3.Price Ceilings and Floors4.Production Quotas5.Import Tariffs
Total surplus•The area under the demand curve and above the market price provides a measure of consumer surplus (CS)–More on this at the end of chapter 5•Producer Surplus (PS) is the area above the market supply curve and below the market price.–More on this at the end of chapter 9
1. Surplus Maximization in Competitive EquilibriumDemandSupplyQPQ*P*ABCDQ1PdPsFGEConsumer Surplus at (Q*,P*): ABCProducer Surplus at (Q*,P*) : DBCTotal Surplus at (Q*,P*): ADC
Extra practice•Given Market supply curve Q = 60P•Find producer surplus when price is $2.50 per gallon•How much does producer surplus change when price of milk increases from $2.50 to $4.00?