graphically producer surplus is measured as the area This is a topic that many people are looking for. star-trek-voyager.net is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, star-trek-voyager.net would like to introduce to you Finding Consumer Surplus and Producer Surplus Graphically . Following along are instructions in the video below:
“Analyzing how much value markets. Create for society. We often talk about the terms consumer consumer surplus and producers are close and we know conceptually. What those terms mean consumer is the value created for consumers above and beyond the price that they pay for an item and producer surplus is the value created for producers.
When they receive compensation or price. For what they re selling above and beyond the marginal costs that it cost to produce. But it s also helpful to be able to incorporate these concepts into our supply and demand diagrams so let s think about how to identify consumer surplus and producer surplus graphically. Luckily we can always use three simple rules to identify consumer surplus on the supply and demand diagram consumer surplus is the area that s one below the demand curve two above the price of the consumer pays for the item and three to the left of the equilibrium quantity or the quantity.
That s actually transacted in a market. So we have three examples here we can think about how to apply these three rules and always get a correct calculation or identification of consumer surplus. So this first one over here is just our typical free market diagram. We don t have any price controls.
We don t have any regulation. All we have here is regular supply and event so let s think about our goals. We say that consumer surplus is the area below the demand. Curve above the price of the consumer pays well in this instance.
There s only one price. And that price is the same for both the consumer and the producer and to the left of the equilibrium quantity transacted so we would see in this situation that our consumer surplus is this triangle here now you notice that because this is a triangle this third rule about to the left of the equilibrium quantity seemed a little bit redundant. But that s not always going to be the case. It s important to keep that rule in mind.
So let s look at another example here here. We have a tax now again our three rules our consumer surplus is the area below the demand. Curve and notice. We ve just drawn our tax wedge diagram here.
So we have it s just our regular demand curve for the consumer. So below the demand curve above the price of the consumer pays so in this case. We mean the price inclusive of the taxed because that s the price that s relevant for the consumer..
So we re going to be looking at this price. Here is the relevant price and to the left of the quantity transacted. Which is going to be this q star sub t. When we have this tax in place.
So here our consumer surplus is this area here again. It s a triangle so this third rule was sort of obvious or redundant. But now let s look at a case. Where that s not true so.
Here we have a price ceiling. So you put a price ceiling and placements of binding price ceiling. It actually affects our market. We can still use our rules.
So we re looking for consumer surplus to be the area below the demand curve above the price of the consumer pays again with the price ceiling. We only have one price because the consumer and the producer have that both are subject to that same price. But now because of this price ceiling our equilibrium quantity. We have to think about how many units are actually being transacted because obviously we can t get surplus on units that are not bought and sold and we say when we have a price ceiling in place supply becomes.
The limiting factor so our relevant quantity transacted is here well now unlike before if we were to think about these three boundaries. We can extend this up and we could see that our boundaries give us not a triangle. But a trapezoid nonetheless. Our rules still hold and we know that this area here is in fact our consumer surplus.
So again just a couple reminders about some common pitfalls in calculating consumer surplus. One is that it s really important to identify the price that s specifically relevant for the consumer. Because there s no guarantee that there s only going to be one relevant parts in a market that sometimes we have a price. It s relevant for the consumer.
And then a price is relevant for the producer second the quantity that s transacted in a market is not necessarily the same as the quantity demanded at a particular price. So you can look here. And it seems like because we re talking about consumer surplus..
We want to be thinking about this quantity demanded except it takes both a buyer and a seller to make a transaction and consumers can only get consumer surplus on units that are actually bought and sold so here even though this would be the quantity demanded of this price. That s not what s relevant because all these consumers who are subject to this shortage are left with nothing and therefore not getting any surplus. Similarly. We have three simple rules for identifying producer surplus on a graph and those three rules actually pretty much take the same structure as we had for consumer surplus.
So the rules for producer surplus is that we have to find the area one above the supply curve or if we wanted to think about this in a slightly different way above the marginal cost curve depending on context. 2 below the price. That s relevant for the producer and three to the left of the equilibrium quantity or the quantity transacted in a market. So those sound pretty analogous to the rules for consumer surplus.
So let s think about how to apply them here again first. We have the simple case of our basic supply and demand program with our free market and we can say alright you got to find the area above the supply curve below the price. That s relevant for the producer. And here.
We just have one equilibrium price. So it becomes a non issue and to the left of the equilibrium quantity. Transacted. So it seems pretty clear here that our producer surplus is just this triangle and again that third rule about to the left of the equilibrium quantity.
Seems a little bit redundant. Because again the first two to find a triangle and then the third one didn t really add anything. But that s not always going to be the case. So let s come over to our second example.
Which as we said represents a tax on market. We have a tax wedge. We have our new equilibrium quantity and so on and so forth. So again.
Our producer surplus is the area above the supply. Curve and notice. How this is really easy to do with our wedge diagram..
Because we haven t actually moved either the supply. Curve or the demand curve. So above the supply curve below the price. That s relevant for the producer.
So now it s this price here because that s the price that the producer gets to keep when a tax is placed on market and to the left of the quantity transacted in that market. So again. We have a triangle. The renders that last rule sort of off sleep.
When nonetheless producer surplus is here and last. But not least. I cheated a little bit here because i wanted to give you an example that wasn t a triangle so what we had before is a price ceiling. I now have is a price floor.
So you notice. I move this around a little bit announces. Pf and we can use our rules. Above.
The price below the demand curve to the left of the equilibrium quantity to see that our consumer surplus for a price floor would have in fact been here and we can also label with our price floor that the lesser of the quantity. The quantity supplied at that price when a price floors binding is going to be our equilibrium quantity. So we can use our rules to identify producer surplus on this graph and we could say all right above the supply curve below the price. It s relevant for the producer.
Again the price floor is just going to be the same price. It s relevant for the consumer and the producer. So above this guy below this guy and to the left of the quantity transacted in the market which we said is this here. Because the distance between the quantity.
Demanded and the quantity supplied at this price is just a surplus. It s not actually items that are getting bought and sold and producers can t make certain can t make surplus on items that they don t actually buy yourself so we have producer surplus that looks like this here. We can label this now as i was talking so actually we have one potential source of confusion..
And then we re using the word surplus in two different contexts right so we could talk about a surplus meaning. Literally extra stuff that s left over in a market. One for example. We have a price floor or we can talk about surplus as the value created for consumers or producers in a market and those are two obviously different concepts and you want to treat them as different.
But it should be obvious from context. Which one it is you re talking about and notice here now that we have our example of that case. Where our surplus is not going to be a triangle. So all three rules do in fact become relevant.
We have 1 2 3. Again we can recap some common pitfalls. When calculating producer surplus. The first one of course to be you need to make sure that you re finding the price.
That s relevant specifically for the producer. You know that might in some cases be the same price. That s relevant for the consumer. But not always so you want to make sure that you re looking below the correct price and to coming back to this issue.
Here. Producer surplus is not necessarily gotten on all of the units that are being produced that we re only getting producer surplus on units if they re actually being sold so we need to look and make sure that we re calculating producer surplus is compared to the quantity that s actually being bought and sold in the market. Which might not be the same as the quantity supplied by producers in that market in the case specifically of this price for whether the producer surplus is this trapezoid here or this entire triangle is actually going to depend on whether or not the government or a third party actually buys up all the surplus at this price. What if we re just leaving the price floor to itself.
And saying while you re just going to sell what you can sell to consumers. And then you re done. Producer surplus is going to look like this here. ” .
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This video shows how to find consumer surplus and producer surplus on a supply and demand diagram using three simple rules.
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Economic Surplus, consumer surplus, producer surplus, economics, economics 101, Microeconomics (Field Of Study), microeconomics