Chapter 6
Consumer Surplus
and Producer
Surplus
McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Consumer Surplus
• Benefit surplus
• Maximum willingness to pay (WTP)
less than actual price paid
Person
Bob
Barb
Bill
Bart
Brent
Betty
Max WTP Actual Price
$13
$8
$12
$8
$11
$8
$10
$8
$9
$8
$8
$8
CS
$5
$4
$3
$2
$1
$0
6-2
Consumer Surplus
S
Price (Per Bag)
Consumer
Surplus
Equilibrium
Price = $8
P1
D
Q1
Quantity (Bags)
6-3
Producer Surplus
• Benefit surplus
• Actual price received more than
minimum acceptable price (AP)
Person
Carlos
Courtney
Chuck
Cindy
Craig
Chad
Min AP
$3
$4
$5
$6
$7
$8
Actual Price
$8
$8
$8
$8
$8
$8
PS
$5
$4
$3
$2
$1
$0
6-4
Producer Surplus
S
Price (Per Bag)
Producer
Surplus
Equilibrium
Price = $8
P1
D
Q1
Quantity (Bags)
6-5
Efficiency Revisited
• Productive and allocative efficiency
S
Price (Per Bag)
Consumer
Surplus
What would
happen if
Demand
was more
elastic?
Equilibrium
Price = $8
P1
D2
Producer
Surplus
D1
Q1
Quantity (Bags)
6-6
Productive Efficiency
Productive efficiency is a situation in which
the economy could not produce any more of one
good without sacrificing production of another
good. The concept is illustrated on a production
possibility frontier (PPF), where all points on the
curve are points of productive efficiency.[1] An
equilibrium may be productively efficient without
being allocatively efficient— i.e. it may result in a
distribution of goods where social welfare is not
maximized.
Allocative Efficiency
Allocative efficiency is a state of the
economy in which production represents
consumer preferences; in particular, every
good or service is produced up to the point
where the last unit provides a marginal
benefit to consumers equal to the marginal
cost of producing. At the point of allocative
efficiency, price is equal to marginal cost.
Productive and Allocative
Efficiency
Are Price Controls Good or Bad?
To be “efficient” a market must maximize
consumers and producers surplus
P
S
CS
Pc
PS
D
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ACDC Leadership 2015
Qe
10
Are Price Controls Good or Bad?
To be “efficient” a market must maximize consumers and
producers surplus
P
S
Pc
DEAD WEIGHT LOSS
The Lost CS and PS.
CS
INEFFICIENT!
Price
CEILING
PS
D
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Qceiling Qe
11
Are Price Controls Good or Bad?
To be “efficient” a market must maximize consumers and
producers surplus
P
S
CS
Pc
PS
D
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ACDC Leadership 2015
Qe
12
Are Price Controls Good or Bad?
To be “efficient” a market must maximize consumers and
producers surplus
P
S
Price
FLOOR
Pc
CS
DEAD WEIGHT LOSS
INEFFICIENT!
PS
Not Maximizing
CS and PS
D
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ACDC Leadership 2015
Qfloor Qe
13
2010 Question 3
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2010 Question 4
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2012 Question 17
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