Understanding Consumer and Producer Surplus
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ScribdTranslationsUnderstanding Consumer and Producer Surplus
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ScribdTranslationsExcedente del consumidor, del productor y total Pep Aguiló
Consumer surplus
The consumer surplus is the difference between the amount that a
the consumer is willing to pay for a certain quantity of a
product (or service) and what it really has to pay for its existence
of the market.
P
Offer
p
Surplus of
consumer
P1
Expense
consumer
Demand Q
q Q1
In the previous chart, one can see how a certain consumer
will require the amount Q1for the market price P1However,
this consumer is willing to pay a higher price for the
first units of the good or service. In other words, for
any amount less than Q1is willing to pay a price
greater than P1For example, to be willing to pay p (which is greater than
what P1for the first q units of the good.
De esta forma podemos observar cual es la cantidad que realmente paga
the consumer analyzed by the quantity Q1of the good; what will be the area
yellowish shaded area. This area corresponds to the product
to multiply the quantity Q1for the market price P1.
However, the consumer is willing to pay more: In fact, they are
willing to pay the amount previously indicated (the one established by the
market, in yellowish shading), plus the one that corresponds to the
triangle located earlier below the demand curve and to the left
of the amount Q1That is, the shaded area in bluish color.
In this way, given a demand function, the lower it is
the higher the price, the greater the consumer surplus, that is, in better
this situation will be.
This reasoning can be extended from a demand
individual to a market demand.
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Excedente del consumidor, del productor y total Pep Aguiló
It can be established that the CONSUMER SURPLUS measures the
benefit that buyers gain from participating in a market
Conclusion: the area located below the demand curve and above the
price measures consumer surplus in a market. The reason is that
the height of the demand curve measures the value that consumers place on
Well, that is, their willingness to pay for it.
The concept of consumer surplus is of interest to economists because it
try to determine if a consumer or group of consumers improve
or worsen their position in the face of market condition changes
they participate in.
Let's consider, for example, water:
In fact, the consumer pays the same for each liter of water in a market.
what is purchased or consumed. And this price corresponds to what is
willing to pay for the last unit consumed (the most marginal).
For the consumer, the other units (the first ones) are more valuable.
that the last one and consequently each one of them generates a "surplus of
consumer" since they are willing to pay more than what they actually are.
you have to pay.
Let's consider that the first units of water consumed are dedicated to
the drink, that is, to the preservation of life. The following to hygiene
personal, important use, although not as much as the previous one. In this way
we will be descending in the importance given to water uses until we reach
las últimas unidades consumidas que serán dedicadas (con toda probabilidad)
to trivial things such as playing with the dog, etc.
Logically, the rational consumer will be willing to pay more for the
first uses that end with the last.
Water, when abundant, will have the price corresponding to the last use.
What we can assume happens normally.
The price paid for water corresponds to its latest use.
even if it is dedicated to the first one. Therefore, the first use, for which it is
willing to pay a lot, one must only pay the price of the last, it is
generator of that consumer surplus.
If the consumer demands at a price of 2 units, 50 liters/day.
This means that each liter of water costs him 2 um.
In total, the fifty liters will cost: 2X50=100 um.
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Consumer surplus, producer surplus, and total Pep Aguiló
price/liter
Demand
30 40 50 liters per day
The consumer is willing to pay 8 um/liter for the first 30 liters.
the next 10 liters is willing to pay 4 um./liter. And for the 10
next 2 um./liter. So that in total for the first 50 liters it is
willing to pay 300 um. while in reality, they only have to pay
100 um. as we have already seen.
The difference between one figure and the other constitutes the consumer surplus that
In this case it will be 300-100 = 200 um.
The consumer is
willing to pay
first 30 liters → 8um. → 30 multiplied by 8 equals 240
for the next 10 L. → 4um. → 10x4= 40
for the next 10 L. → 2um. → 10x2= 20
TOTAL 300
CONSUMER SURPLUS
Producer surplus
The exact same reasoning can be applied to the suppliers.
the sellers. That is, the producer surplus is the income that
obtains the offeror for the sale of a good or service less the cost of
to produce it. And in the same way, it measures the benefit they obtain.
sellers for participating in a market. And, likewise, is very
related to the supply curve.
In the following graph, the Producer Surplus is represented in
bluish color.
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Consumer surplus, producer surplus, and total Pep Aguiló
Price
Surplus
of
prof uctor
O
Quantity
In this case, the producer surplus increases through
increases in the price of the good (or service) it offers.
Both surpluses are instruments aimed at studying the
"well-being" of buyers and sellers in order to try
to observe how these change in response to possible modifications of the
market conditions. This will allow us to determine if a situation
is more desirable than another. And, obviously, it will always be better that one
situation where the sum of both surpluses is greater.
Thus, following the logic of our argument regarding total excellence
can be defined as the difference between the value that the units of
exchanged products have for the demanders less the cost of
production of the suppliers.
Surplus
Total
Given all the above, we can say that if a situation (assignment) of
The market maximizes total surplus, we say it shows efficiency.
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Consumer surplus, producer surplus, and total Pep Aguiló
Alternatively, efficiency is the property of an allocation of the
resources (market situation) whereby it maximizes surplus
total received by the members of society (buyers and
sellers).
It is true that society is interested in efficiency, as one of the
great virtues of the free market system, although it is also true
that is also interested in equity.
The equity is the justice of the distribution among buyers.
(demanders) and sellers (suppliers). So, without a doubt, fairness is
more difficult to evaluate than efficiency, so at the level we are at
we will focus solely on efficiency, leaving equity for later
Go ahead. However, the important thing is that we are aware that
a situation can be efficient absolutely independently
of its distributive justice.
Conclusions of the analysis
Only the demanders (buyers) participate in the market (purchase)
they value the good above the equilibrium price. While from
In the same way, only those bidders whose costs are participating (sellers)
lower than the equilibrium price.
Thus:
Free markets allocate the supply of goods to buyers.
that they assign greater value to, represented by their willingness to
pay.
They also assign the demand for goods to the suppliers who
they can produce at lower costs.
Free markets produce the quantity of goods that maximizes
the sum of consumer and producer surplus.
In other words, the result of an equilibrium in a free market gives
place for an efficient allocation of resources. This is why it is common
consider that free markets are the best mechanism for
organize the economic activity.
This is the essential reason why Adam Smith stated in 1776 that in the
In the free market, there was an invisible hand that transformed interests.
individuals in collective well-being.
Each individual tries (by using their capital) to generate income
the society's annual be as large as possible. As a general rule, not
tries to promote public welfare does not even know how much it is contributing
to it. Preferring to support domestic activity instead of foreign ones,
only seeks its own safety, and directing that activity in such a way that
get the highest value, only seek their own gain, and in this way
in other cases it is driven by an invisible hand that promotes a
objective that does not fit into its purposes. It is also not negative for the
society that is not part of its intention, since pursuing its
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Consumer surplus, producer surplus, and total surplus Pep Aguiló
Self-interest promotes that of society more effectively than if
I really try to promote it. There aren ’t many good things.
made by those who say they are engaged in trade in favor of
public welfare. It is also true that this is a somewhat
common among merchants, and a few words are enough to
dissuade them from her(The Wealth of Nations, pp. 503-504)
IMPORTANT NOTICE,
The conclusions we have reached imply a series of
elements that we have not mentioned:
Perfectly competitive markets
No existence of either external benefits or costs
(externalities), that is, that all those who participate in the
markets assume the entirety of the costs of their decisions, both
if they are for purchase as if they are for sale.