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3/16/05;3:42 PM;chapter;500_12489_CH06_144-169;6;Page 144;Consumer;and Producer Surplus;MAKING GAINS BY THE BOOK;T;HERE IS A LIVELY MARKET IN SECOND-;analyzing a wide variety of economic issues.;hand university textbooks. At the;They let us calculate how much benefit pro-;end of each term, some students;ducers and consumers receive from the exis-;who took a course decide that the money;tence of a market. They also allow us to cal-;they can get by selling their used books is;culate how the welfare of consumers and;worth more to them than keeping the books.;producers is affected by changes in market;And some students who are taking the;prices. Such calculations play a crucial role;course next term prefer to buy a somewhat;in evaluating many economic policies.;battered but inexpensive used textbook;rather than pay the full price for a new one.;Textbook publishers and authors are not;The meaning of consumer surplus and its relationship to the;demand curve;The meaning of producer surplus and its relationship to the;supply curve;The meaning and importance of;total surplus and how it can be;used both to measure the gains;from trade and to evaluate the;efficiency of a market;How to use changes in total surplus to measure the deadweight;loss of taxes;happy about these transactions, because;they cut into sales of new books. But both;the students who sell used books and those;who buy them clearly benefit from the exis-;David Young-Wolff/PhotoEdit;What you will learn in;this chapter;tence of the market. That is why many university bookstores facilitate their trade;buying used textbooks and selling them;alongside the new books.;But can we put a number on what used;How much am I willing to pay for that used textbook?;textbook buyers and sellers gain from these;What information do we need to calcu-;transactions? Can we answer the question;late consumer and producer surplus? The;How much do the buyers and sellers of;answer, surprisingly, is that all we need are;textbooks gain from the existence of the;the demand and supply curves for a good.;used-book market?;That is, the supply and demand model isnt;just a model of how a competitive market;how to measure benefits, such as those to;worksits also a model of how much con-;buyers of used textbooks, from being able to;sumers and producers gain from partici-;purchase a goodknown as consumer surplus.;pating in that market. So our first step will;And we will see that there is a corresponding;be to learn how consumer and producer;measure, producer surplus, of the benefits;surplus can be derived from the demand;sellers receive from being able to sell a good.;and supply curves. We will then see how;The concepts of consumer surplus and;144;Yes, we can. In this chapter, we will see;these concepts can be applied to actual;producer surplus are extremely useful for;economic issues.;500_12489_CH06_144-169;3/16/05;3:42 PM;Page 145;Consumer Surplus And The Demand Curve;The market in used textbooks is not a big business in terms of dollars and cents. But;it is a convenient starting point for developing the concepts of consumer and producer surplus.;So lets look at the market for used textbooks, starting with the buyers. The key;point, as well see in a minute, is that the demand curve is derived from their tastes;or preferencesand that those same preferences also determine how much they gain;from the opportunity to buy used books.;Willingness to Pay and the Demand Curve;A used book is not as good as a new bookit will be battered and coffee-stained, may;include someone elses highlighting, and may not be completely up to date. How;much this bothers you depends on your own preferences. Some potential buyers;would prefer to buy the used book if it is only slightly cheaper than a new book;while others would buy the used book only if it is considerably cheaper. Lets define;a potential buyers willingness to pay as the maximum price at which he or she;would buy a good, in this case a used textbook. An individual wont buy the book if;it costs more than this amount but is eager to do so if it costs less. If the price is just;equal to an individuals willingness to pay, he or she is indifferent between buying;and not buying.;The table in Figure 6-1 shows five potential buyers of a used book that costs $100;new, listed in order of their willingness to pay. At one extreme is Anne, who will buy;a second-hand book even if the price is as high as $59. Brad is less willing to have a;Figure;6-1;A consumers willingness to pay for a;good is the maximum price at which he;or she would buy that good.;The Demand Curve for Used Textbooks;Price of;book;$59;Potential;buyers;Anne;Willingness;to pay;Anne;45;Brad;35;25;35;Darren;25;Erica;Carolyn;45;Carolyn;Brad;$59;10;Darren;10;Erica;D;0;1;2;3;4;5;Quantity of books;With only five potential consumers in this market;the demand curve is step-shaped. Each step represents one consumer, and its height indicates that;consumers willingness to pay, the maximum price;at which each student will buy a used textbook;as indicated in the table. Anne has the highest;willingness to pay at $59, Brad has the next high-;est at $45, and so on down to Erica with the lowest at $10. At a price of $59 the quantity;demanded is one (Anne), at a price of $45 the;quantity demanded is two (Anne and Brad), and;so on until you reach a price of $10 at which all;five students are willing to purchase a book.;145;500_12489_CH06_144-169;146;PA R T 1;3/16/05;3:42 PM;Page 146;INDIVIDUALS AND MARKETS;used book, and will buy one only if the price is $45 or less. Carolyn is willing to pay;only $35, Darren only $25. And Erica, who really doesnt like the idea of a used book;will buy one only if it costs no more than $10.;How many of these five students will actually buy a used book? It depends on the;price. If the price of a used book is $55, only Anne buys one, if the price is $40, Anne;and Brad both buy used books, and so on. So the information in the table on willingness to pay also defines the demand schedule for used textbooks.;As we saw in Chapter 3, we can use this demand schedule to derive the market;demand curve shown in Figure 6-1. Because we are considering only a small number;of consumers, this curve doesnt look like the smooth demand curves of earlier chapters, where markets contained hundreds or thousands of consumers. This demand;curve is step-shaped, with alternating horizontal and vertical segments. Each horizontal segmenteach stepcorresponds to one potential buyers willingness to pay.;However, well see shortly that for the analysis of consumer surplus it doesnt matter;whether the demand curve is stepped, as in this figure, or whether there are many;consumers, making the curve smooth.;Willingness to Pay and Consumer Surplus;Individual consumer surplus is the net;gain to an individual buyer from the purchase of a good. It is equal to the difference between the buyers willingness to;pay and the price paid.;Total consumer surplus is the sum of;the individual consumer surpluses of all;the buyers of a good.;The term consumer surplus is often;used to refer to both individual and to;total consumer surplus.;Suppose that the campus bookstore makes used textbooks available at a price of $30.;In that case, Anne, Brad, and Carolyn will buy books. Do they gain from their purchases, and if so, how much?;The answer, shown in Table 6-1, is that each student who purchases a book does;achieve a net gain but that the amount of the gain differs among students.;Anne would have been willing to pay $59, so her net gain is $59 $30 = $29. Brad;would have been willing to pay $45, so his net gain is $45 $30 = $15. Carolyn would;have been willing to pay $35, so her net gain is $35 $30 = $5. Darren and Erica;however, wont be willing to buy a used book at a price of $30, so they neither gain;nor lose.;The net gain that a buyer achieves from the purchase of a good is called that;buyers individual consumer surplus. What we learn from this example is that;every buyer of a good achieves some individual consumer surplus.;The sum of the individual consumer surpluses achieved by all the buyers of a good;is known as the total consumer surplus achieved in the market. In Table 6-1, the;total consumer surplus is the sum of the individual consumer surpluses achieved by;Anne, Brad, and Carolyn: $29 + $15 + $5 = $49.;Economists often use the term consumer surplus to refer to both individual and;total consumer surplus. We will follow this practice, it will always be clear in context whether we are referring to the consumer surplus achieved by an individual or;by all buyers.;TABLE;6-1;Consumer Surplus When the Price of a Used Textbook Is $30;Potential;buyer;Willingness to pay;Price paid;Individual consumer surplus;= willingness to pay price paid;Ann;$59;$30;$29;Brad;45;30;15;Carolyn;35;30;5;Darren;25;Erica;10;Total consumer surplus: $49;500_12489_CH06_144-169;3/16/05;3:42 PM;Page 147;CHAPTER 6;Figure;CONSUMER AND PRODUCER SURPLUS;6-2;Consumer Surplus in the;Used Textbook Market;At a price of $30, Anne, Brad, and Carolyn;each buy a book but Darren and Erica do not.;Anne, Brad, and Carolyn get individual consumer surpluses equal to the difference;between their willingness to pay and the;price, illustrated by the areas of the shaded;rectangles. Both Darren and Erica have a willingness to pay less than $30, so are unwilling;to buy a book in this market, they receive;zero consumer surplus. The total consumer;surplus is given by the entire shaded area;the sum of the individual consumer surpluses;of Anne, Brad, and Carolynequal to $29 +;$15 + $5 = $49.;Price of;book;Annes consumer surplus;$59 $30 = $29;$59;Anne;Brads consumer surplus;$45 $30 = $15;45;Brad;Carolyns consumer surplus;$35 $30 = $5;35;Carolyn;30;Price = $30;25;Darren;10;Erica;D;0;1;2;3;4;Total consumer surplus can be represented graphically. Figure 6-2 reproduces the;demand curve from Figure 6-1. Each step in that demand curve is one book wide;and represents one consumer. For example, the height of Annes step is $59, her;willingness to pay. This step forms the top of a rectangle, with $30the price she;actually pays for a bookforming the bottom. The area of Annes rectangle, ($59;$30) 1 = $29, is her consumer surplus from purchasing a book at $30. So the;individual consumer surplus Anne gains is the area of the dark blue rectangle shown;in Figure 6-2.;In addition to Anne, Brad and Carolyn will also buy books when the price is $30.;Like Anne, they benefit from their purchases, though not as much, because they each;have a lower willingness to pay. Figure 6-2 also shows the consumer surplus gained;by Brad and Carolyn, again, this can be measured by the areas of the appropriate rectangles. Darren and Erica, because they do not buy books at a price of $30, receive no;consumer surplus.;The total consumer surplus achieved in this market is just the sum of the individual consumer surpluses received by Anne, Brad, and Carolyn. So total consumer surplus is equal to the combined area of the three rectanglesthe entire shaded area in;Figure 6-2. Another way to say this is that total consumer surplus is equal to the area;that is under the demand curve but above the price.;This illustrates the following general principle: The total consumer surplus generated;by purchases of a good at a given price is equal to the area below the demand curve but;above that price. The same principle applies regardless of the number of consumers.;When we consider large markets, this graphical representation becomes extremely helpful. Consider, for example, the sales of personal computers to millions of;potential buyers. Each potential buyer has a maximum price that he or she is willing;to pay. With so many potential buyers, the demand curve will be smooth, like the one;shown in Figure 6-3.;Suppose that at a price of $800, a total of 1 million computers are purchased. How;much do consumers gain from being able to buy those 1 million computers? We;5;Quantity of books;147;500_12489_CH06_144-169;148;PA R T 1;3/16/05;3:42 PM;Page 148;INDIVIDUALS AND MARKETS;Figure;6-3;Consumer Surplus;Price of;computer;The demand curve for computers is smooth;because there are many potential buyers of computers. At a price of $800, 1 million computers are;demanded. The consumer surplus at this price is;equal to the shaded area: the area below the;demand curve but above the price. This is the;total gain to consumers generated from consuming;computers when the price is $800. >web...;Consumer surplus;Price = $800;$800;D;0;1 million;Quantity of computers;could answer that question by calculating the consumer surplus of each individual;buyer and then adding these numbers up to arrive at a total. But it is much easier just;to look at Figure 6-3 and use the fact that the total consumer surplus is equal to the;shaded area. As in our original example, consumer surplus is equal to the area below;the demand curve but above the price.;How Changing Prices Affect Consumer Surplus;It is often important to know how much consumer surplus changes when the price;changes. For example, we may want to know how much consumers are hurt if a frost;in Florida drives up orange prices, or how much consumers gain if an expansion of;fish farming makes salmon less expensive. The same approach we have used to;derive consumer surplus can be used to answer questions about how changes in;prices affect consumers.;Lets return to the example of the market for used textbooks. Suppose that the;bookstore decided to sell used textbooks for $20 instead of $30. How much would;this increase consumer surplus?;The answer is illustrated in Figure 6-4. As shown in the figure, there are two parts;to the increase in consumer surplus. The first part, shaded dark blue, is the gain of;those who would have bought books even at the higher price. Each of the students;who would have bought books at $30Anne, Brad, and Carolynpays $10 less, and;therefore each gains $10 in consumer surplus from the fall in price to $20. So the;dark blue area represents the $30 increase in consumer surplus to those three buyers. The second part, shaded light blue, is the gain to those who would not have;bought a book at $30 but are willing to pay more than $20. In this case that means;Darren, who would not have bought a book at $30 but does buy one at $20. He gains;$5the difference between his willingness to pay $25 and the new price of $20. So;the light blue area represents a further $5 gain in consumer surplus. The total;increase in consumer surplus is the sum of the shaded areas, $35. Likewise, a rise in;500_12489_CH06_144-169;3/16/05;3:42 PM;Page 149;CHAPTER 6;Figure;CONSUMER AND PRODUCER SURPLUS;149;6-4;Consumer Surplus and a Fall in the;Price of Used Textbooks;There are two parts to the increase in consumer;surplus generated by a fall in price from $30 to;$20. The first is given by the dark blue rectangle: each person who would have bought at the;original price of $30Anne, Brad, and;Carolynreceives an increase in consumer surplus equal to the total fall in price, $10. So the;area of the dark blue rectangle corresponds to;an amount equal to 3 $10 = $30. The second;part is given by the light blue rectangle: the;increase in consumer surplus for those who;would not have bought at the original price of;$30 but who buy at the new price of $20;namely, Darren. Darrens willingness to pay is;$25, so he now receives consumer surplus of;$5. The total increase in consumer surplus is 3;$10 + $5 = $35, represented by the sum of;the shaded areas. Likewise, a rise in price from;$20 to $30 would decrease consumer surplus by;an amount equal to the sum of the shaded;areas.;Price of;book;$59;Increase in Annes;consumer surplus;Anne;Increase in Brads;consumer surplus;45;Brad;35;Increase in Carolyns;consumer surplus;Carolyn;Original price = $30;30;25;Darren;New price = $20;20;10;Erica;Darrens;consumer;surplus;D;0;1;2;3;4;price from $20 to $30 would decrease consumer surplus by an amount equal to the;sum of the shaded areas.;Figure 6-4 illustrates that when the price of a good falls, the area under the;demand curve but above the pricewhich we have seen is equal to the total consumer surplusincreases. Figure 6-5 shows the same result for the case of a;smooth demand curve, the demand for personal computers. Here we assume that;the price of computers falls from $5,000 to $800, leading to an increase in the;quantity demanded from 200,000 to 1 million units. As in the used-textbook;example, we divide the gain in consumer surplus into two parts. The dark blue;rectangle in Figure 6-5 corresponds to the dark blue area in Figure 6-4: it is the;gain to the 200,000 people who would have bought computers even at the higher price of $5,000. As a result of the price fall, each receives additional surplus of;$4,200. The light blue triangle in Figure 6-5 corresponds to the light blue area in;Figure 6-4: it is the gain to people who would not have bought the good at the;higher price but are willing to do so at a price of $800. For example, the light blue;triangle includes the gain to someone who would have been willing to pay $3,000;for a computer, and therefore gains $2,200 in consumer surplus when he or she;is able to buy a computer for only $800. As before, the total gain in consumer;surplus is the sum of the shaded areas, the increase in the area under the demand;curve but above the price.;What would happen if the price of a good were to rise instead of fall? We would;do the same analysis in reverse. Suppose, for example, that for some reason the price;of computers increased from $800 to $5,000. This would lead to a fall in consumer;surplus, equal to the shaded area in Figure 6-5. This loss consists of two parts. The;5;Quantity of books;500_12489_CH06_144-169;150;PA R T 1;3/16/05;3:42 PM;Page 150;INDIVIDUALS AND MARKETS;Figure;6-5;A Fall in the Price Increases;Consumer Surplus;Price of;computer;A fall in the price of a computer from $5,000 to;$800 leads to an increase in the quantity demanded and an increase in consumer surplus. The;change in total consumer surplus is given by the;sum of the shaded area: the total area below the;demand curve but between the old and new prices.;Here, the dark blue area represents the increase in;consumer surplus for the 200,000 consumers who;would have bought a computer at the original;price of $5,000, they each receive an increase in;consumer surplus of $4,200. The light blue area;represents the increase in consumer surplus for;those willing to buy at a price equal to or greater;then $800 but less than $5,000. Similarly, a rise;in the price of a computer from $800 to $5,000;generates a decrease in consumer surplus equal to;the sum of the two shaded areas. >web...;Increase in consumer;surplus to original buyers;$5,000;Consumer surplus;gained by new buyers;$800;D;0;200,000;1 million;Quantity of computers;dark blue rectangle represents the loss to consumers who would still buy a computer, even at a price of $5,000. The light blue triangle represents the loss to consumers;who decide not to buy a computer at the higher price.;FOR;INQUIRING;MINDS;I WA N T A N E W D R U G...;TThe pharmaceutical industry is constantly introducing new prescription drugs. Some of these;drugs do the same thing as other, existing drugs;but a bit betterfor example, pretty good allergy medicines have been around for years, but;newer versions that are somewhat more effective;or have fewer side effects keep emerging. Other;drugs do something that was previously considered impossiblea famous example from the;late 1990s was Propecia, the pill that slows and;in some cases reverses hair loss.;Such innovations raise a difficult question;for the people who are supposed to measure;economic growth: how do you calculate the;contribution of a new product to the economy?;You might at first say that its just a matter;of dollars and cents. But that could be wrong;in either direction. A new painkiller that is;just slightly better than aspirin might have;huge sales, because it would take over the;painkiller marketbut it wouldnt really add;much to consumer welfare. On the other hand;the benefits of a drug that cures the previously incurable might be much larger than the;money actually spent on itafter all, people;would have been willing to pay much more.;Consider, for example, the benefits of antibiotics. When penicillin was introduced in 1941;it transformed the treatment of infectious disease, illnesses that had previously crippled or;killed millions of people were suddenly easy to;treat. Presumably most people would be willing;to pay a lot not to go back to the days before;penicillin. Yet the average Canadian spends;only a few dollars per year on antibiotics.;The right way to measure the gains from a;new drugor any new productis therefore;to try to figure out what people would have;been willing to pay for the good, and subtract;what they actually pay. In other words, the;gains from a new drug should be measured by;calculating consumer surplus!;500_12489_CH06_144-169;3/16/05;3:42 PM;Page 151;CHAPTER 6;CONSUMER AND PRODUCER SURPLUS;151;economics in action;When Money Isnt Enough;The key insight we get from the concept of consumer surplus is that purchases yield;a net benefit to the consumer, because the consumer pays a price that is less than the;amount he or she would have been willing to pay for the good. Another way to say;this is that the right to buy a good at the going price is a valuable thing in itself.;Most of the time we dont think about the value associated with the right to buy;a good. In a market economy, we take it for granted that we can buy whatever we;want, as long as we are willing to pay the price. But that hasnt always been true. For;example, during World War II many goods in Canada were rationed in order to make;resources available for the war effort. To buy sugar, eggs, butter, or gasoline and many;other goods, you not only had to pay cash, you also had to present stamps or coupons;from special books that were issued to each family by the government. These pieces;of paper, which represented nothing but the right to buy goods at the market price;quickly became valuable commodities in themselves. As a result, black markets in;sugar stamps and gasoline coupons sprang into existence. Moreover, criminals began;stealing coupons, and even counterfeiting stamps.;The funny thing was that even if you had bought a gasoline coupon on the black;market, you still had to pay the regular price of gasoline to fill your tank. So what you;were buying on the black market was not the good but the right to buy the goodthat;is, people who bought ration coupons on the black market were paying for the right;to get some consumer surplus.;CHECK YOUR UNDERSTANDING 6-2;1. Consider the market for cheeseQuantity;Caseys;Josies;stuffed jalapeno peppers. There;of peppers willingness to pay;willingness to pay;are two consumers, Casey and;1st pepper;$0.90;$0.80;Josie, and their willingness to;pay for each pepper is given in;2nd pepper;0.70;0.60;the accompanying table. Use the;3rd pepper;0.50;0.40;table (i). to construct the;4th pepper;0.30;0.30;demand schedule for peppers for;prices of $0.00, $0.10, and so on, up to $0.90, and (ii) to calculate the total consumer surplus when the price of a pepper is $0.40.;Solutions appear at back of book.;Producer Surplus And The Supply Curve;Just as buyers of a good would have been willing to pay more for their purchase than;the price they actually pay, sellers of a good would have been willing to sell it for less;than the price they actually receive. We can therefore carry out an analysis of producer surplus and the supply curve that is almost exactly parallel to that of consumer;surplus and the demand curve.;Cost and Producer Surplus;Consider a group of students who are potential sellers of used textbooks. Because they;have different preferences, the various potential sellers differ in the price at which;they are willing to sell their books. The table in Figure 6-6 shows the prices at which;several different students would be willing to sell. Andrew is willing to sell the book;as long as he can get anything more than $5, Betty wont sell unless she can get at;QUICK REVIEW;The demand curve for a good is;determined by the willingness to;pay of each potential consumer.;Individual consumer surplus is the;net gain an individual consumer;gets from buying a good.;The total consumer surplus in a;given market is equal to the area;under the demand curve but above;the price.;A fall in the price of a good increases consumer surplus through two;channels: a gain to consumers who;would have bought at the original;price and a gain to consumers who;are persuaded to buy by the lower;price. A rise in the price of a good;reduces consumer surplus in a similar fashion.;500_12489_CH06_144-169;152;PA R T 1;3/16/05;3:42 PM;Page 152;INDIVIDUALS AND MARKETS;Figure;6-6;The Supply Curve for Used Textbooks;Price of;book;S;Potential;sellers;Cost;Andrew;35;Ethan;25;25;Donna;Donna;35;15;Charles;Ethan;$5;Betty;$45;45;Charles;15;Betty;Andrew;5;0;1;2;3;4;5;Quantity of books;The supply curve illustrates sellers cost, the lowest price at which a potential seller is willing to;sell the good, and quantity supplied at that price.;Each of the five students has one book to sell and;each has a different cost, as indicated in the;A potential sellers cost is the lowest;price at which he or she is willing to sell;a good.;Individual producer surplus is the net;gain to a seller from selling a good. It is;equal to the difference between the;price received and the sellers cost.;accompanying table. At a price of $5 the quantity supplied is one (Andrew), at $15 it is two;(Andrew and Betty), and so on until you reach;$45, the price at which all five students are willing to sell.;least $15, Charles, unless he can get $25, Donna, unless she can get $35, Ethan;unless he can get $45.;The lowest price at which a potential seller is willing to sell has a special name in economics: it is called the sellers cost. So Andrews cost is $5, Bettys is $15, and so on.;Using the term cost, which people normally associate with the monetary cost of;producing a good, may sound a little strange when applied to sellers of used textbooks. The students dont have to manufacture the books, so it doesnt cost the student who sells a book anything to make that book available for sale, does it?;Yes, it does. A student who sells a book wont have it later, as part of a personal collection. So there is an opportunity cost to selling a textbook, even if the owner has completed the course for which it was required. And remember that one of the basic principles of economics is that the true measure of the cost of doing anything is always its;opportunity costthe real cost of something is what you must give up to get it.;So it is good economics to talk of the minimum price at which someone will sell;a good as the cost of selling that good, even if he or she doesnt spend any money;to make the good available for sale. Of course, in most real-world markets the sellers;are also those who produce the goodand therefore do expend money to make the;good available for sale. In this case the cost of making the good available for sale;includes monetary costsbut it may also include other opportunity costs.;Getting back to the example, suppose that Andrew sells his book for $30. Clearly;he has gained from the transaction: he would have been willing to sell for only $5, so;he has gained $25. This gain, the difference between the price he actually gets and his;costthe minimum price at which he would have been willing to sellis known as;his individual producer surplus.;Just as we derived the demand curve from the willingness to pay of different consumers, we can derive the supply curve from the cost of different producers. The step-;500_12489_CH06_144-169;3/16/05;3:42 PM;Page 153;CONSUMER AND PRODUCER SURPLUS;CHAPTER 6;shaped curve in Figure 6-6 shows the supply curve implied by the costs shown in the;accompanying table. At a price less than $5, none of the students are willing to sell;at a price between $5 and $15, only Andrew is willing to sell, and so on.;As in the case of consumer surplus, we can add the individual producer surpluses;of sellers to calculate the total producer surplus, the total gains to sellers in the;market. Economists use the term producer surplus to refer to either total or individual producer surplus. Table 6-2 shows the net gain to each of the students who;would sell a used book at a price of $30: $25 for Andrew, $15 for Betty, and $5 for;Charles. The total producer surplus is $25 + $15 + $5 = $45.;TABLE;Total producer surplus in a market is;the sum of the individual producer surpluses of all the sellers of a good.;Economists use the term producer surplus to refer both to individual and to;total producer surplus.;6-2;Producer Surplus When the Price of a Used Textbook Is $30;Potential;seller;Cost;Price received;Individual producer surplus;= price received cost;Andrew;$5;$30;$25;Betty;15;30;15;Charles;25;30;5;Donna;35;Ethan;45;Total producer surplus: $45;As with consumer surplus, the producer surplus gained by those who sell books;can be represented graphically. Figure 6-7 reproduces the supply curve from Figure;6-6. Each step in that supply curve is one book wide and represents one seller. The;height of Andrews step is $5, his cost. This forms the bottom of a rectangle, with;$30, the price he actually receives for his book, forming the top. The area of this;rectangle, ($30 $5) 1 = $25, is his producer surplus. So the producer surplus;Figure;6-7;Producer Surplus in the UsedTextbook Market;At a price of $30, Andrew, Betty, and Charles each;sell a book but Donna and Ethan do not. Andrew;Betty, and Charles get individual producer surpluses;equal to the difference between the price and their;cost, illustrated here by the shaded rectangles.;Donna and Ethan each have a cost that is greater;than the price of $30, so are unwilling to sell a;book and therefore receive zero producer surplus.;The total producer surplus is given by the entire;shaded area, the sum of the individual producer;surpluses of Andrew, Betty, and Charles, equal to;$25 + $15 + $5 = $45.;Price of;book;S;$45;Ethan;Donna;35;Price = $30;30;25;Betty;Andrews;producer;surplus;Andrew;5;0;Charless;producer;surplus;Charles;15;1;2;3;4;153;5;Bettys;producer;surplus;Quantity of books;500_12489_CH06_144-169;154;PA R T 1;3/16/05;3:42 PM;Page 154;INDIVIDUALS AND MARKETS;Figure;6-8;Producer Surplus;Here is the supply curve for wheat. At a;market price of $5 per bushel, farmers;supply 1 million bushels. The producer;surplus at this price is equal to the;shaded area: the area above the supply;curve but below the price. This is the;total gain to producersfarmers in this;casefrom supplying their product when;the price is $5.;Price of;wheat;(per bushel);S;Price = $5;$5;Producer;surplus;0;1 million;Quantity of wheat (bushels);Andrew gains from selling his book is the area of the dark red rectangle shown in;the figure.;Lets assume that the campus bookstore is willing to buy all the used copies of this;book that students are willing to sell at a price of $30. Then, in addition to Andrew;Betty and Charles will also sell their books. They will also benefit from their sales;though not as much as Andrew, because they have higher costs. Andrew, as we have;seen, gains $25. Betty gains a smaller amount: since her cost is $15, she gains only;$15. Charles gains even less, only $5.;Again, as with consumer surplus, we have a general rule for determining the total;producer surplus from sales of a good: The total producer surplus from sales of a good;at a given price is the area above the supply curve but below that price.;This rule applies both to examples like the one shown in Figure 6-7, where there are;a small number of producers and a step-shaped supply curve, and to more realistic;examples where there are many producers and the supply curve is more or less smooth.;Consider, for example, the supply of wheat. Figure 6-8 shows how producer surplus depends on the price per bushel. Suppose that, as shown in the figure, the price;is $5 per bushel and farmers supply 1 million bushels. What is the benefit to the;farmers from selling their wheat at a price of $5? Their producer surplus is equal to;the shaded area in the figurethe area above the supply curve but below the price of;$5 per bushel.;Changes in Producer Surplus;If the price of a good rises, producers of the good will experience an increase in producer surplus, though not all producers gain the same amount. Some producers;would have produced the good even at the original price, they will gain the entire;price increase on every unit they produce. Other producers w


Paper#22597 | Written in 18-Jul-2015

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