CH06 - 500_12489_CH06_144-169 3/16/05 3:42 PM Page 144...

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Consumer and Producer Surplus MAKING GAINS BY THE BOOK What you will learn in this chapter: The meaning of consumer sur- plus and its relationship to the demand curve The meaning of producer sur- plus and its relationship to the supply curve The meaning and importance of total surplus and how it can be used both to measure the gains from trade and to evaluate the efficiency of a market How to use changes in total sur- plus to measure the deadweight loss of taxes 144 HERE IS A LIVELY MARKET IN SECOND- hand university textbooks. At the end of each term, some students who took a course decide that the money they can get by selling their used books is worth more to them than keeping the books. And some students who are taking the course next term prefer to buy a somewhat battered but inexpensive used textbook rather than pay the full price for a new one. Textbook publishers and authors are not happy about these transactions, because they cut into sales of new books. But both the students who sell used books and those who buy them clearly benefit from the exis- tence of the market. That is why many uni- versity bookstores facilitate their trade, buying used textbooks and selling them alongside the new books. But can we put a number on what used textbook buyers and sellers gain from these transactions? Can we answer the question, How much do the buyers and sellers of textbooks gain from the existence of the used-book market?” Yes, we can. In this chapter, we will see how to measure benefits, such as those to buyers of used textbooks, from being able to purchase a good—known as consumer surplus . And we will see that there is a corresponding measure, producer surplus , of the benefits sellers receive from being able to sell a good. The concepts of consumer surplus and producer surplus are extremely useful for >> T chapter 6 analyzing a wide variety of economic issues. They let us calculate how much benefit pro- ducers and consumers receive from the exis- tence of a market. They also allow us to cal- culate how the welfare of consumers and producers is affected by changes in market prices. Such calculations play a crucial role in evaluating many economic policies. What information do we need to calcu- late consumer and producer surplus? The answer, surprisingly, is that all we need are the demand and supply curves for a good. That is, the supply and demand model isn’t just a model of how a competitive market works—it’s also a model of how much con- sumers and producers gain from partici- pating in that market. So our first step will be to learn how consumer and producer surplus can be derived from the demand and supply curves. We will then see how these concepts can be applied to actual economic issues.
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This note was uploaded on 09/09/2009 for the course ECON 701 taught by Professor Charlie during the Spring '09 term at École Normale Supérieure.

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CH06 - 500_12489_CH06_144-169 3/16/05 3:42 PM Page 144...

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