MICROECONOMICS

CHAPTER 4:
MARKET AND WELFARE
 Consumer Surplus
• Consumer surplus is the difference between what
consumers are willing to pay and what they actually pay.

• Consumer surplus can be found in the area above the price

and below the demand curve.

• Consumer surplus can be calculated using the formula for the

area of a triangle.
 11
Consider the entire market for gadgets. With
many buyers, the demand curve is smooth
10
instead of stepped.
9

8 The current price is $3.

7

5 To calculate the value of consumer surplus,

Price 4
Consumer Surplus find the area of the triangle.
3

2
area = ½(base)(height)
1

1 2 3 4 5 6 7 8 9 10 11

Quantity of Gadgets
(hundreds)
 11 If the price decreases to $2, what is the
10
increase in consumer surplus:
To existing customers - shown in red.
9
To new customers - shown in green.
8

5
Price 4
Consumer Surplus
3

1 2 3 4 5 6 7 8 9 10 11

Quantity of Gadgets (hundreds)

 Producer Surplus
• Producer surplus is the difference between the price
received and the seller's cost.

• Producers surplus can be found in the area below the price

and above the supply curve.

• Producer surplus can be calculated using the formula for the

area of a triangle.
 11

10

6 Producer Surplus
Consider the entire market for gadgets. With
5
many sellers, the supply curve is smooth
Price 4 instead of stepped.
3

2 The current price is $7.

1

1 2 3 4 5 6 7 8 9 10 11

Quantity of Gadgets (hundreds) To calculate the value of producer surplus, find

the area of the triangle.

area = ½(base)(height)
 11

10

6 Producer
Surplus
5
Price If the price increases to $8, what happens to
4
producer surplus?
3
For existing producers? shown in green
2 For new producers? shown in red
1

1 2 3 4 5 6 7 8 9 10 11

Quantity of Gadgets (hundreds)

 13

12

11

10
consumer surplus $.........
9

8
Consumer
Surplus producer surplus $.........
7

6 Producer
Surplus
5 total economic $..........
Price 4 surplus
3

1 2 3 4 5 6 7 8 9 10 11

Quantity of Gadgets (hundreds)

 Costs of Taxation
• Tax on a good levied on buyers
• Demand curve shifts leftward
• By the size of tax
• Tax on a good levied on sellers
• Supply curve shifts leftward
• By the size of tax
The Effects of a Tax
P
Without a tax,
CS = A + B + C
PS = D + E + F A
Tax revenue = 0 S
B C
Total surplus PE
D E
= CS + PS
=A+B+C D
F
+D+E+F

Q
QT QE
The Effects of a Tax
P
With the tax,
CS = A
PS = F
Price A
Tax revenue buyers =P S
pay B
=B+D Price B C
without
Total surplus tax D E
Price
=A+B sellers
=PS D
+D+F receive F
The tax reduces
total surplus by Q
C+E QT QE
The Effects of a Tax P
C + E is called the
deadweight loss
(DWL) of the tax, A
PB S
the fall in total
B C
surplus that
results from a market D E
distortion, such as a PS D
tax. F

Q
QT QE