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Consumer and Producer Surplus

Consumer and Producer Surplus. 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. Joint Supply. S Petrol. S Oil. Price. Price. S1. 15. Surplus. 6.

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Consumer and Producer Surplus

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  1. Consumer and Producer Surplus

  2. 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.

  3. Joint Supply S Petrol S Oil Price Price S1 15 Surplus 6 10 5 D1 D D 100 150 95 120 80 Quantity bought and sold Quantity bought and sold

  4. 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 paribusthere is less available for butter

  5. Composite Demand S1 S Milk S Cheese Price Price 20 9 6 10 Shortage D1 D D 100 130 20 50 80 Quantity bought and sold Quantity bought and sold

  6. 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

  7. Derived Demand S Plasterers Wage Rate (£ per hour) Price (000s) S Houses 20 200 Shortage 12 180 D1 D1 D D 100 130 80 90 120 Quantity hired Quantity bought and sold

  8. 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

  9. 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

  10. 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

  11. Producer Surplus Price (£) Market price = £10 S 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 Quantity Supplied 60 35

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