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Unformatted text preview: 7-17CONSUMER & PRODUCER SURPLUSPurpose: To provide practice in computing and understanding producer and consumer surplus.Computer file: csps98.xlsInstructions and background information:The concepts of producer and consumer surplus help economists make welfare(normative) judgments about different ways of producing and distributing goods. For example,we might want to know whether the current level of production of pizzas is the best one fromsocietys point of view, or whether social welfare might be improved by having more or lesspizza. If current pizza production is socially optimal, then the amount of societys resourcesbeing devoted to pizza is about right. Analyzing consumer and producer surplus allows us to saywhether current production is optimal or not.Consumer surplusis the difference between the value to buyers of a level of consumptionof a good and the amount the buyers must pay to get that amount. Consumer surplus is thewelfare consumers get from the good.Consumer surplus can be estimated from thedemand curve for a good. Graph a) shows thedemand curve for pizza, and Q* pizzas are beingconsumed. Suppose that pizzas sell for P*, thehighest price that could be charged for Q*. The valueconsumers place on consuming Q* is the area A+B. But consumers pay only P* for each pizza, paying P*times Q* in all. Consumers get a value A+Bat a costof B. The area Ais the consumer surplus.Producer surplusis the difference between the revenue sellers take in from sale of a goodand the minimum amount they would accept to produce it. Producer surplus is the welfare sellersget from selling a good....
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