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Consumer and Producer Surplus

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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.

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Joint Supply
Price

S Oil

S Petrol
Price

S1

15

10

Surplus

D1

D 100 150 80 95
Quantity bought and sold

D 120
Quantity bought and sold

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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

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Composite Demand
S Milk
Price Price

S1 S Cheese

20

9 6

10

Shortage

D1

D 100 130 20 50 80
Quantity bought and sold

D
Quantity bought and sold

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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
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Derived Demand
Price (000s) S Houses Wage Rate ( per hour) 20 200

S Plasterers

180 D1

12

Shortage

D1 D 80 90 120 Quantity hired

D 100 130

Quantity bought and sold

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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

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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

Total utility = value represented by blue and gold area

Blue area is amount paid to acquire good. Gold area = total consumer surplus

D = Marginal Utility
15 20 Quantity Demanded

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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
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Price () 10

Producer Surplus
S
Market price = 10

At 10, suppliers willing to offer 60 for sale

Total Revenue = blue area 10 x 60 = 600

Some suppliers would have offered 35 for sale at 6: Producer surplus = 35 x 4 = 140 Gold area = Producer surplus

35

60

Quantity Supplied

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