http://www.bized.ac.

uk

Consumer and Producer

Surplus

Copyright 2006 – Biz/ed

 http://www.bized.ac.uk

Joint Supply
• Where an increase/decrease
in supply of one good leads to
an increase/decrease in supply
of another
• Beef/hides, Lamb/wool, oil/fuels,
milk/dairy products, cocoa/husks,
etc.

Copyright 2006 – Biz/ed

 http://www.bized.ac.uk

Joint Supply
S Oil S Petrol
Price Price
S1
15

Surplus
10 6

5
D1

D D
100 150 80 95 120
Quantity bought and sold Quantity bought and sold

Copyright 2006 – Biz/ed

 http://www.bized.ac.uk

Composite Demand
• Where goods have more than one use –
an increase in the demand for one leads
to a fall in supply of the other
• Milk – used for cheese, yoghurts,
cream, butter, etc.
• If more milk is used for cheese, ceteris
paribus there is less available
for butter

Copyright 2006 – Biz/ed

 http://www.bized.ac.uk

Composite Demand
S1
S Milk
S Cheese
Price Price

20 9

10 6
Shortage

D1

D D
100 130 20 50 80
Quantity bought and sold Quantity bought and sold

Copyright 2006 – Biz/ed

 http://www.bized.ac.uk

Derived Demand
• Where the demand for one good is
dependent on the demand for
another related good
• Construction industry – demand for new
office construction – demand for office
space
• Demand for construction workers –
demand for construction work
• Factor markets – derived demand

Copyright 2006 – Biz/ed

 http://www.bized.ac.uk

Derived Demand
Price Wage Rate S Plasterers
(000s) S Houses (£ per hour)

20
200

Shortage
180 12

D1
D1

D D

100 130 80 90 120

Quantity bought and sold Quantity hired

Copyright 2006 – Biz/ed

 http://www.bized.ac.uk

Consumer Surplus
• The difference between the price
that a consumer is prepared to pay
and the actual price paid
• Related to the value we place on items
• Linked to the degree of utility
• Useful concept in analysing welfare gains
and losses as a result of resource allocation
• Emphasis on the MARKET demand – of those
in the market there are some who are willing
to pay higher prices than the market price

Copyright 2006 – Biz/ed

 http://www.bized.ac.uk

Consumer Surplus
Price (£) Market Price = £5 20 consumers willing to pay £5
15 Consumers WILLING to pay £9
These 15 consumers get 15 x £4
9
of consumer surplus
Total utility = value represented by
blue and gold area
5
Blue area is amount paid to
acquire good. Gold area = total
consumer surplus

D = Marginal Utility
15 20 Quantity Demanded

Copyright 2006 – Biz/ed

 http://www.bized.ac.uk

Producer Surplus
• Difference between the market
price received by the seller and
the price they would have been
prepared to supply at
• Price received – linked to factor
cost + element of normal profit
• Producer surplus = abnormal profit

Copyright 2006 – Biz/ed

 http://www.bized.ac.uk

Price (£)
Producer Surplus
S Market price = £10

At £10, suppliers willing to offer

10 60 for sale

Total Revenue = blue area

£10 x 60 = £600

6 Some suppliers would have offered

35 for sale at £6:
Producer surplus = 35 x £4 = £140

Gold area = Producer surplus

35 60 Quantity Supplied

Copyright 2006 – Biz/ed