consumer and producers surplus

7/29/2019 Consumer and Producers Surplus

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CONSUMER AND PRODUCERS SURPLUS

The consumers surplus

This is the difference between the price a consumer is willing to pay and the

actual price he pays for the commodity.

e.g. if a consumer goes to the market to buy 1 kg of meat at Shs 2000 but he

finds the same kg at Shs 1500 he then enjoys the surplus of Shs 500Alternatively consumers surplus to extra utility enjoyed by a consumer without

paying for it.

Graphically consumers surplus is represented by the area above the market

price and below the demand curve.

Mathematically consumers surplus is represented by the difference between

total utility and marginal utility i.e. TUMU = consumers surplus.

Question

Study the table below and answer the questions that follow:-

Price (Shs) Quantity demanded

300 1

250 2

200 3

150 4

100 5

50 6

Using Shs 150 as the fixed market price

i) calculate the consumers surplus

ii) Illustrate the level of consumers surplus on the

graph

The producers surplus

This refers to the difference between the price a producer is willing to charge

and what he actually charges.

Price Quantity supplied

300 1


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350 2

400 3

450 5

500 6

550 7

650 8

MU TU

MU = 550 x 6 = 3,300Shs

TU = 300 + 350 + 400 + 450 + 500 + 550 + = 2250

Producers surplus = 3300 2200 = 750Shs

Graphically producers surplus is represented by the above the supply curve and

below the market price. Graphically it is shown as below: - supplyMARKET EQUILIBRIUM

When supply and demand are equal (i.e. when the supply curve and demand

curve intersect) the economy is said to be at equilibrium.

At this point, the allocation of goods is at its most efficient because the amount

of goods being supplied is exactly the same as the amount of goods being

demanded.


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DETERMINATION OF EQUILIBRIUM PRICE AND QUANTITY USING THE

DEMAND AND SUPPLY FUNCTIONS

Given the following functions:

Qd = 36 4PQs = -12 + 12P,

Calculate the equilibrium price and quantity.

SOLUTION


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DEVIATIONS FROM EQUILIBRIUM

Maximum Price Legislation: This is where the government sets the maximum

price of a commodity such that it becomes illegal for one to buy or sell above

that price. It is usually imposed in periods of scarcity of commodities.

Effects of Maximum Price Legislation

If the government sets the maximum price at OP2;

(i). There would be excess demand.

(ii). Artificial shortage of the commodity where sellers board

commodities to create shortage and sell at very high prices

(iii). Black-market would prevail i.e. a market in which commodities are

sold illegally are prices that violate the restriction. Sellers would break the law

and sell at very low prices behind the counters.

(iv). Bribery, corruption and selling of scarce commodities to only

friends

MINIMUM PRICE LEGISLATION (PRICE FLOOR)

This is where the government fixes minimum prices of commodities such that it

becomes for one to sell or buy below that price.

consumer and producers surplus

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