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Consumers ’ Surplus ( CS)

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Consumers ’ Surplus ( CS)

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  1. Suppose the minimum price the owner of the movie theater would have accepted foradmission is $5. But she doesn’t sell admission for $5; she sells it for $7. Her producers’ orsellers’ surplus is $2. A seller prefers a large producers’ surplus to a small one. The theaterowner would have preferred to sell admission to the movie for $8 instead of $7 becausethen she would have received $3 producers’ surplus. • Total surplus is the sum of the consumers’ surplus and producers’ surplus. • Total surplus =Consumers’ surplus +Producers’ surplus

  2. Consumers’ Surplus (CS) • The difference between the maximumprice a buyer is willing andable to pay for a good or serviceand the price actually paid. • CS = Maximum buying price – Pricepaid

  3. Producers’ (Sellers’) Surplus (PS) • The difference between the price sellersreceive for a good and the minimumor lowest price for which theywould have sold the good. • PS = Pricereceived - Minimum sellingprice.

  4. Total Surplus (TS) • The sum of consumers’ surplus andproducers’ surplus. • TS = CS + PS.

  5. exhibit 16 (a) Consumers’ surplus • As the shaded areaindicates, the difference between the maximumor highest amount buyers would bewilling to pay and the price they actually pay is consumers’ surplus.

  6. exhibit 16 (b) Producers’ surplus • As the shaded area indicates, the differencebetween the price sellers receive for the goodand the minimum or lowest price they wouldbe willing to sell the good for is producers’surplus.

  7. EXCESS SUPPLY-EXCESS DEMAND

  8. Exhibit 12

  9. Surplus (ExcessSupply): A condition in which quantitysupplied is greater than quantitydemanded. Surpluses occur only atpricesaboveequilibriumprice. • Shortage (ExcessDemand): A condition in which quantitydemanded is greater than quantitysupplied. Shortages occur only atpricesbelowequilibriumprice. • EquilibriumPrice (Market-ClearingPrice): The price at which quantitydemanded of the good equals quantitysupplied. • EquilibriumQuantity: The quantity that corresponds toequilibrium price. The quantity atwhich the amount of the good thatbuyers are willing and able to buyequals the amount that sellers arewilling and able to sell, and bothequal the amount actually boughtandsold.

  10. Moving to Equilibrium: What Happens to PricewhenThere Is a Surplus or a Shortage? • What did the auctioneer do when the price was $9.00 and there was a surplus of corn?He lowered the price. What did the auctioneer do when the price was $5.25 and therewas a shortage of corn? He raised the price. The behavior of the auctioneer can be summarizedthis way: If a surplus exists, lower the price; if a shortage exists, raise the price.This is how the auctioneer moved the corn market into equilibrium.Not all markets have auctioneers. (When was the last time you saw an auctioneerin the grocery store?) But many markets act as if an auctioneer were callingout higher and lower prices until equilibrium price is reached. In many real-worldauctioneer-less markets, prices fall when there is a surplus and rise when there is ashortage. Why?

  11. WHY DOES PRICE FALL WHEN THERE IS A SURPLUS? • In Exhibit 13,there is a surplus at a price of $15: Quantity supplied (150 units) is greater than quantitydemanded (50 units). Suppliers will not be able to sell all they had hoped to sell at$15. As a result, their inventories will grow beyond the level they hold in preparationfor demand changes. Sellers will want to reduce their inventories. Some will lowerprices to do so, some will cut back on production, others will do a little of both. Asshown in the exhibit, there is a tendency for price and output to fall until equilibrium is achieved.

  12. WHY DOES PRICE RISE WHEN THERE IS A SHORTAGE? In Exhibit 13,there is a shortage at a price of $5:Quantity demanded (150 units) is greater thanquantitysupplied (50 units). Buyers will not be able to buy all they had hoped to buy at $5.Some buyers will bid up the price to get sellers to sell to them instead of to other buyers.Some sellers, seeing buyers clamor for the goods, will realize that they can raise the price

  13. Exhibit 13: MovingtoEquilibrium • If there is a surplus, sellers’ inventories riseabove the level they hold in preparation fordemand changes. Sellers will want to reducetheir inventories. As a result, price and outputfall until equilibrium is achieved. If there is ashortage, some buyers will bid up price to getsellers to sell to them instead of to other buyers.Some sellers will realize they can raise theprice of the goods they have for sale. Higherprices will call forth added output. Price andoutput rise until equilibrium is achieved.(Note: Recall that price, on the vertical axis,is price per unit of the good, and quantity,on the horizontal axis, is for a specific timeperiod. In this text, we do not specify this onthe axes themselves, but consider it to beunderstood.

  14. PRICE CONTROLS • Because scarcity exists, there is a need for a rationing device—such as dollar price. Butprice is not always permitted to be a rationing device. Sometimes, price is controlled.There are two types of price controls: price ceilings and price floors. In the discussion ofprice controls, the word price is used in the generic sense. It refers to the price of an apple,for example, the price of labor (wage), the price of credit (interest rate), and so on.

  15. Price Ceiling • A price ceiling is a government-mandated maximum price above which legal trades cannotbe made. For example, suppose the government mandates that the maximum priceat which good X can be bought and sold is $8. It follows that $8 is a price ceiling. If $8is below the equilibrium price of good X, as inExhibit 19, any or all of the following effects mayarise.

  16. Exhibit 19: A PriceCeiling • The price ceiling is $8 and the equilibriumprice is $12. At $12, quantitydemanded = quantitysupplied. At $8 quantitydemanded > quantitysupplied. (Recall that price, on thevertical axis, always represents priceper unit. Quantity, on the horizontalaxis, always holds for a specific timeperiod.)

  17. SHORTAGES • At the $12 equilibrium pricein Exhibit 19, the quantity demanded of good X(150) is equal to the quantity supplied (150). Atthe $8 price ceiling, a shortage exists. The quantitydemanded (190) is greater than the quantitysupplied (100). When a shortage exists, there isa tendency for price and output to rise to equilibrium.But when a price ceiling exists, this tendencycannot be realized because it is unlawful totrade at the equilibrium price.

  18. FEWER EXCHANGES • At the equilibriumprice of $12 in Exhibit 19, 150 units of good Xare bought and sold. At the price ceiling of $8,100 units of good X are bought and sold. (Buyerswould prefer to buy 190 units, but only 100 aresupplied.) We conclude that price ceilings causefewer exchanges to be made.Notice in Exhibit 19 that the demand curve isabove the supply curve for all quantities less than150 units. (At 150 units, the demand curve andthe supply curve intersect and thus share the same point in the two-dimensional space.)

  19. This means the maximum buying price is greater than the minimum selling price for allunits less than 150. In particular, the maximum buying price is greater than the minimumselling price for units 101 to 149. For example, buyers might be willing to pay $17 forthe 110th unit, and sellers might be willing to sell the 110th unit for $10. But no unitafter the 100th unit (not the 110th unit, not the 114th unit, not the 130th unit) will beproduced and sold because of the price ceiling. In short, the price ceiling prevents mutuallyadvantageous trades from being realized.

  20. Exhibit 20:The price floor is $20 and the equilibriumprice is $15. At $15, quantitydemanded = quantitysupplied. At $20, quantitysupplied > quantitydemanded.

  21. 1) In a market whereQdx= 50-0.5P andQsx=20+P, governmentmandates TL 15 as a priceceiling. Findtheexcesssupply. • 2) Qdx= 100-P. Calculatetheconsumersurpluswhentheprice of X is 75. • 3) In a market whereQdx= 50-0.5P andQsx=20+P findthepricelevel at whichgovernment’spriceceilingpolicycan’t be successfull. • 4) Qdx= 50-0.5P. Iftheprice of X fallsto TL 8 from TL 10, calculatethechange in consumersurplus. • 5) Qdx=10-2P. Iftheprice of X fallsto TL 2 from TL 3, calculatethethechange in consumersurplus.

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