What is a producer / consumer surplus? (not talking about demand/supply surplus here)
The net benefit (NB) producers or consumers get from a transaction.
1. Define net benefit (NB)
2. What is NB for producers?
3. What is NB for consumers?
1. The NB is measured as the difference between the benefit and the cost of a transaction.
2. For producers, NB is the difference between the revenue (their benefit) and their costs. *In short, NB is their profit.
3. For consumers, NB is the difference between their benefit measured by their willingness to pay, and the price actually paid (their cost).
ex. Keg steak dinner costs $30. They would be willing to pay $35.
1. What is a consumer's willingness to pay?
2. What is MWTP (marginal willingness to pay)? (2 parts)
1. the maximum price they would pay for a good (otherwise the demand price).
2a. The consumer's willingness to pay for one more unit.
2b. MWTP usually decreases as the quantity of goods purchased increases.
ex. When you buy your first donut, you're willing to pay more. The second, you're less hungry so you're not willing to pay as much.
1. What is the consumer surplus? (CS)?
2. What is CS per unit?
3. What is the Total CS?
CS is the difference between what a consumer is willing to pay for a good and what he/she actually pays
*this determines how we feel about a purchase. If we payed alot less than we would have been willing to pay, we feel really good and vice-versa.
2. CS per unit = MWTP - the price
3. Total CS = the sum of the CS for each unit.
A consumer will be willing to buy a good as long as .....
their MWTP is equal to or greater than the price.
What is the QD?
1. What is the CS
2. What is the Total WTP or TWTP
3. What is the total cost (TC
4. What is the CS
(otherwise known as net benefit NB
QD is 4 puppies
1. CS = $600
2. TWTP = $1000
3. TC = $400
4. CS = $600 (TWTP - TC)
1. How do you calculate the area of a triangle?
2. How do you calculate the area of a trapezoid?
1. (H x W) / 2
2. (H1 + H2) x W / 2
1. What is the PS (producer surplus), otherwise known as the NB net benefit to producers?
2. What is the PS per unit?
3. What is the Total PS?
4. What is the cost for producers? (2 parts)
1. The difference between the price they get and the minimum they would have accepted (their cost or their supply price).
2. PS per unit = price - marginal cost (MC)
3. Total PS = Total revenue - Total Cost
4a. The cost includes the input costs for production, the opportunity costs of time, the opportunity cost in terms of value of the good you're giving up when you sell something used
b. The cost, or the minimum suppliers are willing to accept, is given by the supply curve
What is the MC?
The supply price of each unit.
Sellers will sell a good as long as....
P is greater than or equal to the MC
1. What is PS
2. What is TR
3. What is TC
4. What is the NB
1. $10,500 ($6500 + $3500 + $500)
2. $22,500 ($7500 x 3)
3. $12,000 ($1000 + $4000 + $7000)
4. $10,500 (TR - TC = $22,500 - $12,000)
1. When do possible gains from trade exist?
2. There will be gains from trade for...
3. When graphing Gains from Trade, S is the same as...
and D is the same as...
1. Whenever the willingness to pay by consumers is higher than the minimum price a seller is willing to accept.
2. all units for which D
is higher than S
, or from 0 to Q*
- 3. S = MC = minimum price accepted
- D = MB = maximum willingness to pay
Gains from trade can also be described as opportunities for buyers and sellers to make themselves better off or make ...
mutually beneficial transactions
What happens for any transactions for quantities greater than Q*?
They will not happen because costs are higher than the benefits (S is above D)
What is TS (Total Surplus)?
CS + PS
When looking at Gains from Trade, what happens when the curves shift (D or S)?
There will be a change in change in the price and quantity, and therefore a change in TS
What is DWL? (2)
1. Deadweight loss is the lost potential surplus that occurs from inefficiency in the market. (either price is too low or price is too high).
2. When Q is < Q*, there are missed opportunities and TS is not maximized
What are the pros and cons to taxes?
Pro: Creates equity by providing resources to those with less, or to support social programs
Con: Taxes discourage production and consumption by making goods and services more expensive.
ex. Income taxes discourage some workers from working more
Sales taxes discourage spending
What are two types of taxes we discuss here?
- 1. Excise tax = tax on a specific good
- ex. Gas tax, liquor tax and cigarette tax
- 2. Sales tax = tax on total spending
- ex. PST and GST
What do taxes do to suppliers?
Give an example
A tax adds to the supply price because sellers must collect the tax for the government.
ex. if there is a $20 tax on shoes and sellers want to get $50 a pair, then they actually have to charge $70.
What are the following?
Q* - QT - P* - Pc - Pp
Q* = Equalibrium quantity
QT = Quantity after tax
P* = Equalibrium price
Pc = Price consumers pay
Pp = Price producers pay
Break down what happens with taxes for consumers and suppliers and gov.?
Consumers pay the new equalibrium price of Pc and purchase the quantity after tax QT.
Suppliers keep the supply price of Pp
And the government keeps the difference (the tax)
Why is tax inefficient?
Because it prevents mutually beneficial transactions.
What is the total surplus after taxes?
TS = CS + PS + Tax Revenue
What is ST?
MC + Tax
Its the new supply curve after the tax moves it to the left.
1. What is another name for Consumer's Tax Burden?
2. How do you calculate consumer tax burden?
3. How do you calculate the producer's tax burden?
4. How do you calculate tax revenue?
1. Consumer incidence
2. (Pc - P*) x QT
3. (P* - Pp) x QT
4. Consumer incidence + producer incidence = tax revenue
1. What is represented by a
2. What is represented by b
1. a = Δ CS for customers already in the market when the price was at $140
2. b = Δ CS for new customers entering the market when price decreased to $110
1. What is represented by a?
2. What is represented by b?
1. a = Δ PS for producers already in the market when the price was at $240
2. b = Δ PS for new producers entering the market when price increased to $280
What do the following diagrams demonstrate?
e. Producer's total revenue (at market equalibrium)
f. Producer's total cost (at market equalibrium)
g. ΔCS for consumers entering the market
h. ΔCS for consumers already in the market
What do the following diagrams illustrate?
i. consumer incidence
j. producer incidence
k. total tax revenue
l. total surplus (TS)
What do the following diagrams illustrate?
a. CS if the good is free
b. ΔTS of the market for good X when there is a decrease in producers
c. Consumer's total benefit aka TWTP
d. Consumer's total cost (also producer's total revenue)