# 7-1 - (5x5 = 12.5 = Area of blue triangle PS = ½(5x5 = 12.5 = Area of red triangle The combination of producer and consumer surplus is maximized

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1 Taxation and Government Intervention Chapter 7-1 Laugher Curve Two economists meet on the street. Q. How’s your wife? A. Relative to what? Producer and Consumer Surplus Consumer surplus – the value the consumer gets from buying a product less its price. • It is the area underneath the demand curve and above the price an individual pays.

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2 Producer and Consumer Surplus Producer surplus the value the producer sells a product for less the cost of producing it. • It is the area above the supply curve but below the price the producer receives. Producer and Consumer Surplus • The combination of consumer and producer surplus is as large as it can be at market equilibrium. Producer and Consumer Surplus P r i c e Supply Demand Quantity 0 \$10 9 8 7 6 5 4 3 2 1 10 9 8 7 6 5 4 3 2 1 Producer Surplus Consumer Surplus
3 Producer and Consumer Surplus P r i c e S D Quantity 0 \$10 9 8 7 6 5 4 3 2 1 10 9 8 7 6 5 4 3 2 1 Producer Surplus Consumer Surplus CS = ½

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Unformatted text preview: (5x5) = 12.5 = Area of blue triangle PS = ½ (5x5) = 12.5 = Area of red triangle The combination of producer and consumer surplus is maximized at market equilibrium. Producer and Consumer Surplus • The combined consumer and producer surplus falls when price is above market equilibrium. Producer and Consumer Surplus Supply Demand Quantity \$10 9 8 7 6 5 4 3 2 1 10 9 8 7 6 5 4 3 2 1 Producer Surplus Consumer Surplus Lost Surplus 4 Producer and Consumer Surplus P r i c e S D Quantity \$10 9 8 7 6 5 4 3 2 1 10 9 8 7 6 5 4 3 2 1 Producer Surplus gains 2x4 = 8 units of lost consumer surplus If price is \$6, Consumer Surplus: CS = 1/2 (\$4x4) = \$8 Combined consumer and producer surplus decreases when price is above equilibrium. Lost surplus = ½ (\$2x1) = \$1...
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## This note was uploaded on 01/01/2011 for the course ECON 101 taught by Professor E during the Spring '10 term at American College of Computer & Information Sciences.

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7-1 - (5x5 = 12.5 = Area of blue triangle PS = ½(5x5 = 12.5 = Area of red triangle The combination of producer and consumer surplus is maximized

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