Marketing

Consumer and Producer Surplus
ARSC 1432 Microeconomics Co-Seminar SPRING 2009

Consumer Surplus = CS = the difference between what consumers are willing to pay and what they actually pay for a good or service.

Producer Surplus = PS = the difference between what producers are willing to accept for their produce and what they actually receive for a good or service.

Social Surplus = SS = CS + PS

[pic]
To calculate CS or PS, use the formula for area of a triangle: (½)(base)(height)
Example 1:

[pic]

Example 2:

Ps = 40 + 4Qs Supply Equation
Pd = 100 – 2Qd Demand Equation

To find Equilibrium Ps*=Pd* at equilibrium they are equal so 40+4Qs=100-2Qd or 40+4Q=100-2Q since Qs=Qd also
6Q=60 Q*=60/6=10 Equilibrium quantity

Now to find the price Ps*=40+ 4(10) = 80 or Pd*=100-2(10) = 80

So to graph we say how much is the price when the quantity demanded (or supplied) is zero in both equations Ps = 40 + 4(0)= 40 Pd = 100 – 2(0) = 100. These are the intercepts at the Y axis.
To calculate the intercept at the X axis we say how much is the quantity demanded when the price is zero, so 0 = 100 -2Qd 2Qd=100 Qd=100/2=50 there is no need to calculate the X intercept for the supply equation.
[pic]

Since Consumer Surplus and Producer Surplus are represented by triangles, to calculate their value you can utilize the formula for the area of a triangle = [pic].

So Consumer Surplus is equal to ((100-80) x 10)/2 = (20 x 10)/2= 100 and Producer Surplus is equal to ((80-40) x 10)/2 = (40 x 10)/2= 200

So Total Welfare equals Consumer Surplus + Producer Surplus = 100 + 200 = 300

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P

Q

S

D

CS = area above equilibrium price and below demand

PS = area below equilibrium price and above supply

SS = CS + PS

CS

PS

S