EC4101 Consumer and Producer Surplus Lecture Notes PDF

EC4101 Wk.05 Lec.01 Consumer Surplus: The difference between the price you paid and the maximum you were willing to pay (reservation price). - A consumer’s willingness to pay for a good is the maximum price at which they would buy that good. - Total consumer surplus is the sum of the individual c...

EC4101 Wk.05 Lec.01 Consumer Surplus: The difference between the price you paid and the maximum you were willing to pay (reservation price). - A consumer’s willingness to pay for a good is the maximum price at which they would buy that good. - Total consumer surplus is the sum of the individual consumer surpluses of all the buyers of a good. - Consumer surplus is the area beneath the demand curve and above the price. It is calculated by finding the area of that region. A fall in price increases the consumer surplus in two ways: 1. There is a bigger individual surplus among those who were already buying at the previous price. 2. There is a new surplus for the new customers who weren’t buying at the previous price. Producer Surplus: The benefits producers gain by selling at market price which is higher than what they are willing to sell for. - A potential seller’s cost is the lowest price at which they are willing to sell a good. - Total producer surplus is the sum of the individual producer surpluses of all the sellers of a good. - Producer surplus is the area above the supply curve and below the price. It is calculated by finding the area of that region. A rise in price increases the producer surplus in two ways: 1. There is a bigger individual surplus among those who were already selling at the previous price. 2. There is a new surplus for the new suppliers who weren’t selling at the previous price. References: Notes based on EC4101 Lecture Slides and the relevant readings from Economics (12th Ed.) David Begg. Image 1: econdev.co.za