Lecture 14 - Economics 201 Lecture 14 Calculating Total...

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Economics 201 Lecture 14 Calculating Total Economic Surplus Consumer surplus : the difference between the most a buyer would have been willing to pay for a product and the amount it actually costs her. Producer surplus : the difference between what a company gets paid for the goods it sells, and the smallest amount it would have been willing to accept for them. Total economic surplus : the sum of consumer surplus and producer surplus for all buyers and sellers in a market. It is a measure of the total amount by which they benefit from their participation in that market. Example 14.1. For the equilibrium price and quantity implied by the demand and supply curves shown for the gasoline market, compute consumer and producer surplus. Price ($/gal) Quantity (1000s of gals/day) D S 1.50 3 Producer surplus=$2250/day Consumer surplus=$2250/day 6 3 Even though efficient does not mean the same thing as good, efficiency should be our primary objective because it enables us to pursue all other goals more effectively. When the economic pie is larger, everyone can have a larger slice. R P P R The Efficiency Criterion If resources are to be used efficiently, price must be equal to marginal cost. If price is not equal to marginal cost, resources will be used inefficiently. To say that resources are being used inefficiently is the same thing as saying that resources can be rearranged in a way that helps some people with out hurting others. Example 14.2 . Citizens of a small country use coal for home heating. The country imports all of its coal supplies from abroad. To keep coal affordable for the poor, the government purchases coal at the world price of $100/ton and then sells it to citizens for only $50/ton. Will coal use be efficient in this country?
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Lecture 14 - Economics 201 Lecture 14 Calculating Total...

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