Chapter 4 - Consumer surplus, producer surplus, and economic efficiency. After completing this unit, you should be able to: Describe consumer surplus, producer surplus, economic surplus, and deadweight loss; illustrate and compute consumer surplus, producer surplus, and deadweight loss; describe how economic surplus can represent social welfare and economic efficiency.
Introduction to Economics: Social Issues and Economic Thinking Wendy A Stock Chapter Consumer Surplus, Producer Surplus, and Economic Efficiency Copyright © 2013 John Wiley & Sons, Inc / Photo Credit: ©Krystian Kaczmarski/iStockphoto PowerPoint Prepared by Z Pan After studying this chapter, you should be able to: Ø Ø Ø Describe consumer surplus, producer surplus, economic surplus, and deadweight loss Illustrate and compute consumer surplus, producer surplus, and deadweight loss Ø Ø Assess the impact of market interventions on economic surplus and social welfare Identify groups who benefit and are hurt by market interventions Describe how economic surplus can represent social welfare and economic efficiency Copyright © 2013 John Wiley & Sons, Inc CONSUMER SURPLUS Ø Consumer Surplus is the difference between what someone is willing to pay for a good or service and the price of the good or service It is the net benefit buyers get from buying a good or service Copyright © 2013 John Wiley CONSUMER SURPLUS Copyright © 2013 John Wiley Producer surplus Ø Producer Surplus is the difference between the price at which a seller is willing and able to sell a given good and the actual price received for the good It is the net benefit sellers get from selling a good or service Copyright © 2013 John Wiley Producer surplus Copyright © 2013 John Wiley Economic Surplus Ø Economic Surplus is the sum of consumer surplus plus producer surplus ES = CS + PS Copyright © 2013 John Wiley Economic Surplus Ø ES = CS + PS Copyright © 2013 John Wiley Disequilibrium and inefficiency Deadweight Loss: the loss in economic surplus that results from disequilibrium market outcomes Copyright © 2013 John Wiley Price Ceilings Ø Ø Price Ceiling: An upper limit on the price of a good or service A price ceiling sets the maximum amount that can be charged for a good or service Examples: rent controls, electricity, natural gas and executive pay caps Copyright © 2013 John Wiley 10 Impact of a Price Ceiling Copyright © 2013 John Wiley 11 Price Floors Ø Ø Price Floor: A lower limit on the price of a good or service It sets the minimum amount that can be charged for a good or service Examples: minimum wage, some agricultural products Copyright © 2013 John Wiley 12 Impact of a Price floor Copyright © 2013 John Wiley 13 quotas Ø Ø Quota - A limit on the quantity of a good that can be sold Examples: import quota, sugar beets, tobacco leaf, cotton Copyright © 2013 John Wiley 14 Impact of a quota Copyright © 2013 John Wiley 15 Questions/Discussions The online auction site eBay allows buyers to enter a beginning bid on an item and then automatically increment their bids upward to some maximum bid level Sellers are allowed to enter a minimum price that they will accept for their items, called a reserve price, below which the item will not be sold Use the concepts of producer and consumer surplus to explain why this setup is attractive to buyers and sellers Discussion: Why does eBay promise that it will not reveal theWiley seller’s reserve price or the buyer’s Copyright © 2013 John 16 Key Concepts • Consumer surplus • Producer surplus • Economic surplus • Deadweight loss • Price ceiling • Price floor ã Quota Copyright â 2013 John Wiley 17 ... interventions on economic surplus and social welfare Identify groups who benefit and are hurt by market interventions Describe how economic surplus can represent social welfare and economic efficiency... this chapter, you should be able to: Ø Ø Ø Describe consumer surplus, producer surplus, economic surplus, and deadweight loss Illustrate and compute consumer surplus, producer surplus, and deadweight... auction site eBay allows buyers to enter a beginning bid on an item and then automatically increment their bids upward to some maximum bid level Sellers are allowed to enter a minimum price that