Taxation and Government

Intervention

Chapter 7-1

Laugher Curve
Two economists meet on the street.
Q. How’s your wife?
A. Relative to what?

Producer and Consumer

Surplus
• Consumer surplus – the value the
consumer gets from buying a product less
its price.
• It is the area underneath the demand
curve and above the price an individual
pays.

1
 Producer and Consumer
Surplus
• Producer surplus – the value the
producer sells a product for less the cost
of producing it.

• It is the area above the supply curve but

below the price the producer receives.

Producer and Consumer

Surplus
• The combination of consumer and
producer surplus is as large as it can be at
market equilibrium.

Producer and Consumer

Surplus
$10
9 Consumer Surplus
8 Supply
7
6
Price

5
4 Producer
3 Surplus
2
1 Demand
0
1 2 3 4 5 6 7 8 9 10
Quantity

2
 Producer and Consumer Surplus

$10 CS = ½(5x5) = 12.5 =

9 Consumer Area of blue triangle
8 S
Surplus
7 PS = ½(5x5) = 12.5 =
6 Area of red triangle
Price

5
4 The combination of
3 producer and consumer
2 Producer surplus is maximized at
1 Surplus D market equilibrium.
0
1 2 3 4 5 6 7 8 9 10
Quantity

Producer and Consumer

Surplus
• The combined consumer and producer
surplus falls when price is above market
equilibrium.

Producer and Consumer

Surplus
$10
9 Consumer Surplus
8 Lost Supply
7 Surplus
6
Price

5
4 Producer
3 Surplus
2
1 Demand
0
1 2 3 4 5 6 7 8 9 10
Quantity

3
 Producer and Consumer Surplus
If price is $6, Combined consumer and
Consumer Surplus: producer surplus decreases
$10 CS = 1/2 ($4x4) = $8 when price is above
9 equilibrium.
8 S
7
6
Price

Lost surplus = ½($2x1) = $1

5
4 Producer Surplus gains 2x4 = 8
3 units of lost consumer surplus
2
1 D
0
1 2 3 4 5 6 7 8 9 10
Quantity