PGP-I
Session 9 & 10
Producer Surplus
Definition:
Definition: Producer
Producer Surplus
Surplus isis the
the area
area above
above the
the market
market
supply
supplycurve
curveand
andbelow
belowthe
themarket
marketprice.
price.
ItIt isis aa monetary
monetary measure
measure of
of the
the benefit
benefit that
that producers
producers
derive
derivefrom
fromproducing
producingaagood
goodatataaparticular
particularprice.
price.
Producer Surplus
Further, since the market supply curve is
simply the sum of the individual supply
curves
The difference between price and the
market supply curve measures the surplus
of all producers in the market.
Producer Surplus
P
Market Supply Curve
P*
Producer Surplus
Fridas cost
600
500
Georgias cost
Grandmas cost
The table shows the supply schedule for the sellers . The graph shows the
corresponding supply curve. The height of the supply curve reflects sellers costs.
6
Measuring Producer
with the Supply Curve(b) Price = $800
(a) PriceSurplus
=
$600Painting
Price of House
$900
$900
800
800
600
500
600
500
Grandmas producer
surplus ($100)
Supply
Total producer
surplus ($500)
Georgias producer
surplus ($200)
Grandmas producer
surplus ($300)
In panel (a), the price of the good is $600, and the producer surplus is $100. In
panel (b), the price of the good is $800, and the producer surplus is $500.
Price
Supply
P2
P1
B
Producer
surplus
P1
A
0
Supply
B
C
Initial
producer
surplus
Producer surplus
to new producers
A
Q1
Quantity
Q1
Q2
Quantity
Market Efficiency
Economic well-being of a society
: Total surplus = Sum of consumer and producer surplus
Market Efficiency
Market outcomes
1. Free markets allocate the supply of goods to the buyers who
value them most highly
2. Free markets allocate the demand for goods to the sellers who
can produce them at the least cost
3. Free markets produce the quantity of goods that
maximizes the sum of consumer and producer surplus
Market equilibrium
. Efficient allocation of resources
Market Efficiency
Adam Smiths invisible hand
Takes all the information about buyers and sellers into
account
Guides everyone in the market to the best outcome
Economic efficiency
Deadweight Loss
Deadweight Loss : Loss of Economic Efficiency
Either people who would have more marginal benefit
than marginal cost are not buying the product, or
people who have more marginal cost than marginal
benefit are buying the product.
Monopoly Pricing
Externalities
Taxes or Subsidies
Binding Price Ceiling or floors.
13
With Tax
Impact of Tax
A+B+C+E
-B-C-E
F+G+H
-F-G
Government
Receipts from
Tax
Zero
B+C+G
B+C+G
Deadweight Loss
Zero
E+F
E+F
Consumer
Surplus
Producer Surplus
14
Key Definitions
Definition:
Definition: Incidence
Incidence of
of aa tax
tax isis aa measure
measure of
of the
the effect
effect
of
of aa tax
tax on
on the
the prices
prices consumers
consumers pay
pay and
and sellers
sellers receive
receive
in
in aa market.
market.
Definition:
Definition: The
The amount
amount by
by which
which the
the price
price paid
paid by
by
d
buyers,
buyers, PPd,, rises
rises over
over the
the non-tax
non-tax equilibrium
equilibrium price,
price, P*,
P*,
isis the
the incidence
incidence of
of the
the tax
tax on
on consumers;
consumers;
s
The
The amount
amount by
by which
which the
the price
price received
received by
by sellers,
sellers, PPs,,
falls
falls below
below P*
P* isis called
called the
the incidence
incidence of
of the
the tax
tax on
on
producers.
producers.
15
16
17
= =
=
but for market to clear, Q/Q* must be the same for demand
and supply, hence
=
=
18
Tax Effect
Ps = P*
S
P
Case II
Case I
Pd = P*
Ps = P*-T
T
D
20
21
Subsidies
With No Subsidy
With Subsidy
Impact of
Subsidy
Consumer
Surplus
A+B
A+ B + E + G + K
-B-C-E
Producer Surplus
E+F
B+C+E+F
-F-G
Impact on
Government
Budget
Zero
-B-C-E-G-K
-J
B+C+G
Net Benefits
A+B+E+F
A+B+E+FJ
-E-F
Zero
Deadweight Loss
22
Definition:
Definition: A
A price
price ceiling
ceiling isis aa legal
legal
maximum
maximum on
on the
the price
price per
per unit
unit that
that aa
producer
producer can
can receive.
receive.
IfIf the
the price
price ceiling
ceiling isis below
below the
the pre-control
pre-control
competitive
competitive equilibrium
equilibrium price,
price, then
then the
the
ceiling
ceiling isis called
called binding.
binding.
23
24
With Maximum
Consumer Surplus
(Consumers with
highest willingness to
pay buy all the
available units)
With Minimum
Consumer Surplus
(Consumers with
lowest willingness
to pay buy all the
available units)
Consumer
Surplus
Area YAV
Area YTWS
Area URX
Producer Surplus
Area AVZ
Area SWZ
Area SWZ
Net Benefits
Area YZV
Area YTWZ
Areas URX +
SWZ
Zero
Area TWV
Deadweight Loss
25
People
Find difficult to find own apartments
Induce more people to move to suburbs
Large shortage of housing
26
Definition:
Definition: A
A price
price floor
floor isis aa minimum
minimum price
price
that
that consumers
consumers can
can legally
legally pay
pay for
for aa good.
good. Price
Price
floors
floors sometimes
sometimes are
are referred
referred to
to as
as price
price
supports.
supports.
IfIf the
the price
price floor
floor isis above
above the
the pre-control
pre-control
competitive
competitive equilibrium
equilibrium price,
price, itit isis said
said to
to be
be
binding.
binding.
27
28
With Maximum
Producer Surplus
(the most
efficient workers
find jobs)
With Minimum
Producer Surplus
(the least efficient
workers find
jobs)
Consumer
Surplus
Area YAV
Area YTR
Area YTR
Producer Surplus
Area AVZ
Area RTWZ
Area MNV
Net Benefits
Area YZV
Area YTWZ
Areas YTR +
MNV
Zero
Area TWV
Deadweight Loss
29
30
Definition:
Definition: A
A production
production quota
quota isis aa limit
limit on
on
either
either the
the number
number of
of producers
producers in
in the
the market
market
or
or on
on the
the amount
amount that
that each
each producer
producer can
can
sell.
sell.
The
The quota
quota usually
usually has
has aa goal
goal of
of placing
placing aa limit
limit
on
on the
the total
total quantity
quantity that
that producers
producers can
can
supply
supply to
to the
the market.
market.
32
33
Consumer
Surplus
Producer Surplus
Net Benefits
Deadweight Loss
With No Quota
With Quota
Impact of Quota
A+B+F
- A- B
C+E
A+E
A-C
A+B+C+E+F
A+E+F
-B-C
Zero
B+C
B+C
34
Definition:
Definition: Tariffs
Tariffs are
are taxes
taxes levied
levied by
by aa government
government on
on
goods
goods imported
imported into
into the
the government's
government's own
own country.
country.
Tariffs
Tariffssometimes
sometimesare
arecalled
calledduties.
duties.
Definition:
Definition: An
An import
import quota
quota isis aa limit
limit on
on the
the total
total
number
number of
of units
units of
of aa good
good that
that can
can be
be imported
imported into
into the
the
country.
country.
35
36
With Quota
Impact of Quota
Trade
Prohibition
(quota = 0)
Quota = 3
Million Units
per year
Impact of
Trade
Prohibition
Impact of
Quota = 3
Million Units
per year
Consumer
Surplus
A+ B + C + E
+F+G+H+
J+K
A+ B + C + E
-B-C-E-FG-H-JK
-F-G-H-JK
Producer
Surplus
B+F+L
F+L
B+F
Net Benefits
A+ B + C + E
+F+G+H+
J+K+L
A+ B + F + L
A+ B + C + E
+F+L
-C-E-G-H
-J-K
-G-H-J-K
Deadweight
Loss
Zero
C+E+G+H
+J+K
G+H+J+K
C+E+G+H
+J+K
G+H+J+K
Producer
Surplus
(foreign)
Zero
Zero
H+J
Zero
H+J
37
38
With Tariff
Impact of Tariff
A+B+C+E+F
+G+H+J+K
A+B+C+E
-F-G-H-J-K
F+L
Impact on
Government
Budget
Zero
H+J
H+J
Net Benefits
A+B+C+E+F
+G+H+J+K+
L
A+ B + C + E + F
+L
-G-H-JK
Deadweight Loss
Zero
G+K
G+K
Producer Surplus
(foreign)
Zero
Zero
Zero
Consumer
Surplus
Producer Surplus
39
IsIsthere
thereaadifference?
difference?
The
Thequota
quotagenerates
generatesno
nogovernment
governmentrevenue
revenue!!!
!!!
40