Consumer and Producer Surplus; Price Controls
A. Consumer and Producer Surplus
Some students find the terms consumer and producer ―surplus‖ confusing.
These terms have
to do with surplus (and shortage) as discussed in chapter 4.
It would probably be clearer to call them consumer and
producer ―bonus‖ or something, since that’s what they really are—
from making trades
but if you did, no one else would
know what you’re talking about.)
Back in Chapter 2, we learned about the Principle of Voluntary Exchange:
A voluntary exchange between two people makes both people better off.
If this is so, then we should be able to show it on a graph.
(Remember, this is economics.)
Let’s start with the market for
shown in equilibrium in Figure 1.
In initial equilibrium, price (Pe) is $10 and quantity (Qe) is 500 bags per week.
Recall what each
of these curves represents.
If we think of a city the size of
Decatur, and imagine a big open-air auction market for dog
food, there would be lots of potential buyers, some willing
to pay higher prices than others.
Say that Joe is willing to
pay more for a bag of dog food than any other buyer in the
market, and so if a single bag is auctioned off, Joe will get
although, in auction, he would have to pay a price
approximately equal to his
price he is willing to pay to avoid going without dog food
for this dog, that is).
Say this is $20.
Joe would be sitting at
the very top end of the market demand curve.
(If you look
closely you’ll see him.)
The next highest willing bidder
would be just below him, and so on.
Likewise, sellers would
differ in their production costs, with some being lower,
If Carrie is the lowest cost producer, she
would be located on the lower left end of the market supply
curve, with higher cost producers ranging on up to the right.
(Carrie said her hair wasn’t done and
would never speak to
us again if we showed her in the figure.)
surplus is the extra
, i.e., the net benefit,
receives from a trade.
Thus, it is the
gain from trade.
below the demand
above the supply
Graphically, it is the area