Consumer and Producer Surplus

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• published: 05 Feb 2015
• views: 8145

Transcript: 1 What exactly is consumer surplus? 2 Suppose I want a computer 3 because it gives me a happiness of $700. 4 I go to the market and realize I can buy it at just $500. 5. 6 Woohoo! $200 of net happiness. This is my consumer surplus. 7 On the demand curve, 8 Though everyone pays the same price at $500, 9 different consumers have different willingness to pay. 10 I’m willing to get the computer at $700. 11 It costs only $500. 12 My surplus is $200. 16 Then another guy is willing to pay $600. 17 18 His surplus is lower, at $100. 19 And of course you have a guy who’s only willing to pay $500. 20 21 His surplus is $0. 22 What about a guy who’s willing to pay $400? 23 24 The computer costs $500! No transaction will take place. 25 Add up all these surpluses, this is the total consumer surplus in the market. 26 What about producer surplus? 27 Suppose I produce computers. 28 I want to sell each of these at $300. 29 I go to the market and realize that everyone else is selling these at $500. 30 Happily, I price my computer at $500. Which is cool! 31 I’m expecting $300 but I get $500. 32 That’s $200 extra. 33 On the supply curve, Though everyone sells at the equilibrium price of $500, 34 different producers have different willingness to sell. 35 I hope to sell my computer for at least $300. 36 Sold it at $500. 37 My producer surplus is $200. 38 Another guy wants to sell his computer at $400. 39 40 His surplus will be lower at $100. 41 For a guy who’s wants to sell his computer at $500, 42 43 His producer surplus is $0. Add up all the producer surplus, 44 And you get a triangle area. 45 Add up these 2 triangles, We have the total surplus 46 Also known as the social welfare. 47 All of us know that this is the market equilibrium point. 48 Do you know this is also the allocatively efficient point? Huh? 49 Check out the next video on Allocative Efficiency. 50 If you like this video, remember to like and subscribe. _____________________________________________________ What happens if the equilibrium price is lower than what you, as a consumer, is willing to pay? Do you gain extra happiness? Yeah! Remember? The demand curve is also the marginal benefit. So when price is lower than your marginal benefit, you get 'extra benefit' due to the lower price you have to pay. Different consumers have different willingness to pay. So the lower their willingness to pay, the lower their consumer surplus. For consumers whose willingness and ability to pay are lower than the prevailing market equilibrium price, no transaction will take place. Add up all the individual consumer surplus to get the total consumer surplus. Producers also have different willingness to sell for a very simple reason--the cost of production for different producers is different. Hence, some producers can sell at a lower price while other can't. Remember? The supply curve is also the marginal cost curve. So if the price of the good is higher than the producer's marginal cost, there's a surplus, also known as the producer surplus. Add up the consumer surplus and consumer surplus, you get the total surplus, which is also known as the social welfare.