producer surplus basics
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Copyright © 2004 South-Western
Group no. 2
Copyright © 2004 South-Western
PRODUCER SURPLUS
• Willingness to sell is the minimum amount that a seller will sell a good for.
• It measures the cost to the seller of producing the good or service.
• Producer surplus is the price the seller receives seller’s for a good minus the amount it cost to produce it.
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Using the Supply Curve to Measure Producer Surplus• The market supply curve depicts the various
quantities that sellers would be willing and able to sell at different prices.
• The area below the price and above the supply curve measures the producer surplus in a market.
How the Price Affects Producer Surplus
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Producersurplus
Quantity
(a) Producer Surplus at Price P
Price
0
Supply
B
A
C
Q1
P1
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How higher prices raises PS
Price Quantity demanded
Quantity supplied
10 Rs. for 1 pack
25 pack 25 pack
15 Rs. For 1 pack
25 & 30 30 pack
• Sellers are willing to sell 25 pack of apple juice at Rs.10 a pack and here Sellers cost is Rs.8. buyers are willing to purchase these pack Rs.10 per pack. If the Sellers sells all of the pack to buyers for Rs.10 (1st condition), it will receive Rs.250.
• In 2nd condition Sellers are willing to sell 30 pack of apple juice at Rs.15 a pack by the amount it was willing to accept, (in this case Rs.15), and you find it will receive Rs.375 (by selling 25 pack) & 450 (by selling 30 pack).
Producers surplus :- (amount received – cost)1st condition- (10*25 – 8*25)Producers surplus =(250 – 200) 50 Rs.2nd condition- (15*25 – 8*25)Producers surplus =(375 – 200) 175 Rs. (On 30 QD) – PS = (450 – 200) 250 Rs.
How the higher Price raises Producer Surplus
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Quantity
(b) Producer Surplus at Price P
Price
0
P1B
C
Supply
A
Initialproducersurplus
25Q1
P2
30Q2
Producer surplusto new producers
Additional producersurplus to initialproducers
D EF15
10
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Welfare Economics
• Buyers and sellers receive benefits from taking part in the market.
• The equilibrium in a market maximizes the total welfare of buyers and sellers.
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MARKET EFFICIENCY
• Goods consumed by buyers who value them most highly measured by WTP (D).
• Goods produced by sellers with lowest opportunity cost of production measured by WTS (S).
• Sum of CS & PS, total well-being is maximized.
• Buyers • Sellers
P Qd Qs3.50 35 43.70 33 113.90 31 184.10 29 234.30 27 274.50 23 294.70 18 314.90 11 335.10 4 35
In the Chips
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• Price squeezes to where Qs = Qd and the market clears.
• This price facilitates all transactions that can improve the well-being of market participants.
• Goods purchased by those with highest value.
• Goods produced by those with lowest opportunity cost.
• The well-being of society is maximized.
Market Forces & Equilibrium• Buyers • Sellers
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Market Forces & Equilibrium
• Day 1When price is Rs.40,000
• Day 2 When price is Rs.20,000
• Day 3When price is Rs.10,000
• Day 4 When price is Rs.5,000
• Buyers
IPHONE 5
Total Quantity 4
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Market Forces & Equilibrium
• Day 1When price is Rs.5,000(Cost)
• Day 2 When price is Rs.10,000
• Day 3When price is Rs.20,000
• Day 4 When price is Rs.40,000
• Sellers
Total Quantity 4
IPHONE 5
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Consumer and Producer Surplus in the Market Equilibrium
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Producersurplus
Consumersurplus
Price
0 Quantity
Supply
Demand
A
C
B
D
ERs.20,000
21 3
Rs.40,000
Rs.10,000
Rs.5,000
4
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Summary
• Producer surplus measures the benefit sellers and Consumer surplus measures the benefit buyers get from participating in a market.
• An allocation of resources that maximizes the sum of consumer surplus and producer surplus is efficient.
• The competitive market equilibrium outcome maximizes the sum of consumer surplus and producer surplus and thus maximizes the well-being of market participants.
• All transactions that could possibly improve the well-being of market participants have taken place.