Principles of Economics- Mankiw (5th) 144

Principles of Economics- Mankiw (5th) 144 - 150 PA R T T H...

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150 PART THREE SUPPLY AND DEMAND II: MARKETS AND WELFARE seller who would leave the market first if the price were any lower. At a quantity of 4 houses, for instance, the supply curve has a height of $900, the cost that Mary (the marginal seller) incurs to provide her painting services. At a quantity of 3 houses, the supply curve has a height of $800, the cost that Frida (who is now the marginal seller) incurs. Because the supply curve reflects sellers’ costs, we can use it to measure pro- ducer surplus. Figure 7-5 uses the supply curve to compute producer surplus in our example. In panel (a), we assume that the price is $600. In this case, the quan- tity supplied is 1. Note that the area below the price and above the supply curve equals $100. This amount is exactly the producer surplus we computed earlier for Grandma. Panel (b) of Figure 7-5 shows producer surplus at a price of $800. In this case, the area below the price and above the supply curve equals the total area of the two rectangles. This area equals $500, the producer surplus we computed earlier
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