Consumer And Producer Surplus
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http://www.bized.ac.uk
Consumer and Producer Surplus
Copyright 2006 – Biz/ed
http://www.bized.ac.uk
Joint Supply • Where an increase/decrease in supply of one good leads to an increase/decrease in supply of another • Beef/hides, Lamb/wool, oil/fuels, milk/dairy products, cocoa/husks, etc.
Copyright 2006 – Biz/ed
http://www.bized.ac.uk
Joint Supply S Oil
Price
S Petrol Price
S1
15
Surplus
6
10
D1
5
D
D 100
150
Quantity bought and sold
80
95
120
Quantity bought and sold
Copyright 2006 – Biz/ed
http://www.bized.ac.uk
Composite Demand • Where goods have more than one use – an increase in the demand for one leads to a fall in supply of the other • Milk – used for cheese, yoghurts, cream, butter, etc. • If more milk is used for cheese, ceteris paribus there is less available for butter
Copyright 2006 – Biz/ed
http://www.bized.ac.uk
Composite Demand S1
S Milk Price
Price
20
9
10
6
S Cheese
Shortage
D1
D 100
130
Quantity bought and sold
D 20
50
80 Quantity bought and sold
Copyright 2006 – Biz/ed
http://www.bized.ac.uk
Derived Demand • Where the demand for one good is dependent on the demand for another related good • Construction industry – demand for new office construction – demand for office space • Demand for construction workers – demand for construction work • Factor markets – derived demand Copyright 2006 – Biz/ed
http://www.bized.ac.uk
Derived Demand Price (000s)
S Houses
S Plasterers
Wage Rate (£ per hour) 20
200
12
180
Shortage
D1
D1
D 100
130
Quantity bought and sold
D 80 90
120 Quantity hired
Copyright 2006 – Biz/ed
http://www.bized.ac.uk
Consumer Surplus • The difference between the price that a consumer is prepared to pay and the actual price paid • Related to the value we place on items • Linked to the degree of utility • Useful concept in analysing welfare gains and losses as a result of resource allocation • Emphasis on the MARKET demand – of those in the market there are some who are willing to pay higher prices than the market price
Copyright 2006 – Biz/ed
http://www.bized.ac.uk
Consumer Surplus Price (£)
Market Price = £5
20 consumers willing to pay £5
15 Consumers WILLING to pay £9
These 15 consumers get 15 x £4 of consumer surplus
9
Total utility = value represented by blue and gold area
5
Blue area is amount paid to acquire good. Gold area = total consumer surplus
D = Marginal Utility 15
20
Quantity Demanded
Copyright 2006 – Biz/ed
http://www.bized.ac.uk
Producer Surplus • Difference between the market price received by the seller and the price they would have been prepared to supply at • Price received – linked to factor cost + element of normal profit • Producer surplus = abnormal profit Copyright 2006 – Biz/ed
http://www.bized.ac.uk
Price (£)
Producer Surplus S
Market price = £10 At £10, suppliers willing to offer 60 for sale
10
Total Revenue = blue area £10 x 60 = £600 Some suppliers would have offered 35 for sale at £6: Producer surplus = 35 x £4 = £140
6
Gold area = Producer surplus
35
60
Quantity Supplied
Copyright 2006 – Biz/ed
Consumer and Producer Surplus
Copyright 2006 – Biz/ed
http://www.bized.ac.uk
Joint Supply • Where an increase/decrease in supply of one good leads to an increase/decrease in supply of another • Beef/hides, Lamb/wool, oil/fuels, milk/dairy products, cocoa/husks, etc.
Copyright 2006 – Biz/ed
http://www.bized.ac.uk
Joint Supply S Oil
Price
S Petrol Price
S1
15
Surplus
6
10
D1
5
D
D 100
150
Quantity bought and sold
80
95
120
Quantity bought and sold
Copyright 2006 – Biz/ed
http://www.bized.ac.uk
Composite Demand • Where goods have more than one use – an increase in the demand for one leads to a fall in supply of the other • Milk – used for cheese, yoghurts, cream, butter, etc. • If more milk is used for cheese, ceteris paribus there is less available for butter
Copyright 2006 – Biz/ed
http://www.bized.ac.uk
Composite Demand S1
S Milk Price
Price
20
9
10
6
S Cheese
Shortage
D1
D 100
130
Quantity bought and sold
D 20
50
80 Quantity bought and sold
Copyright 2006 – Biz/ed
http://www.bized.ac.uk
Derived Demand • Where the demand for one good is dependent on the demand for another related good • Construction industry – demand for new office construction – demand for office space • Demand for construction workers – demand for construction work • Factor markets – derived demand Copyright 2006 – Biz/ed
http://www.bized.ac.uk
Derived Demand Price (000s)
S Houses
S Plasterers
Wage Rate (£ per hour) 20
200
12
180
Shortage
D1
D1
D 100
130
Quantity bought and sold
D 80 90
120 Quantity hired
Copyright 2006 – Biz/ed
http://www.bized.ac.uk
Consumer Surplus • The difference between the price that a consumer is prepared to pay and the actual price paid • Related to the value we place on items • Linked to the degree of utility • Useful concept in analysing welfare gains and losses as a result of resource allocation • Emphasis on the MARKET demand – of those in the market there are some who are willing to pay higher prices than the market price
Copyright 2006 – Biz/ed
http://www.bized.ac.uk
Consumer Surplus Price (£)
Market Price = £5
20 consumers willing to pay £5
15 Consumers WILLING to pay £9
These 15 consumers get 15 x £4 of consumer surplus
9
Total utility = value represented by blue and gold area
5
Blue area is amount paid to acquire good. Gold area = total consumer surplus
D = Marginal Utility 15
20
Quantity Demanded
Copyright 2006 – Biz/ed
http://www.bized.ac.uk
Producer Surplus • Difference between the market price received by the seller and the price they would have been prepared to supply at • Price received – linked to factor cost + element of normal profit • Producer surplus = abnormal profit Copyright 2006 – Biz/ed
http://www.bized.ac.uk
Price (£)
Producer Surplus S
Market price = £10 At £10, suppliers willing to offer 60 for sale
10
Total Revenue = blue area £10 x 60 = £600 Some suppliers would have offered 35 for sale at £6: Producer surplus = 35 x £4 = £140
6
Gold area = Producer surplus
35
60
Quantity Supplied
Copyright 2006 – Biz/ed
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