14.2.

CONSUMER AND PRODUCER SURPLUS

14.2

Consumer and Producer Surplus

Consumer and Producer Surplus Let us direct our attention towards applying some of the concepts that we learned in regards to the area of region bounded by two curves. In this section we will use the following notation. D(q) will denote the price-demand equation of product.

The variable q will denote the quantity of the product that is in question. In a free-market economy, the price of an product is determined by the relationship between its supply and demand. A positive surplus occurs when the price is above a certain price-level; whereas, a negative surplus (i.e. shortage) occurs the price is below this price-level. This price-level is known as the equilibrium price. It is the price in which the eects of demand is in balance with a products supply.

The equilibrium-price p0 is the price per unit that the consumers are willing to purchase, and the price that producers are willing to sell.

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S(q) will denote the price-surplus equation of a product. Denition 14.1: Equilibrium-Point for Supply and Demand

The equilibrium-point between for D(q) and S(q) is the point (q0 , p0 ) such that p0 = D(q0 ) = S(q0 ). The p0 is referred to as the equilibrium price, and q0 is known as the equilibrium quantity.

2 Example 1.2 Equilibrium-point Find the equilibrium-point if the D(q) = 25 + 0.2q and S(q) = 1 + 0.01q2 Solution The equilibrium-point between D(q) and S(q) can be found by solving the equation D(q) = S(q). D(q) = S(q)

Since it is impractical for q = 40, it must be the case that q = 60; in other words, the equilibrium-quantity is q0 = 60, which in turns yields the equilibrium-price as S(60) = D(60) = 37. Therefore, the equilibrium-point point is (60, 37).

Sometimes it necessary to determine the dierence between the maximum price and the actual price that a consumer is willing to pay for a product. This quantity is know as the consumer surplus.

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25 0.2q = 1 + 0.01q2 (q 60)(q + 40) = 0 Denition 14.2: Consumer Surplus
q

= D(q ) is dened as The consumer surplus at the price-level of p CS = ) dq. (D(q) p

14.2. CONSUMER AND PRODUCER SURPLUS Example 2.2 Consumers Surplus Determine the consumer surplus at a price-level of of $5 for the price-demand equation D(q) = 41 0.01q2 . Solution when p = 5. The question that rst needs to be addressed is what is the value of q = D( q ) p

= 6; therefore, the consumer surplus, at the given Since quantity is a nonnegative measure, then it follows that q price-level, is found by determining the area bounded by the functions D(q) and p = 5 on the interval [0, 6].
6

This value $215.28 represents the total savings to consumers who are willing to pay a higher price than $5 in order to obtain the product.

The producer surplus measures the dierence between the price in which the producers are willing to supply to the consumers and the actual price that they receive from the consumers.

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2 5 = 41 0.01q 2 3, 600 = q (41 0.01q2 5) dq = 36q
0

q3 3000

6 0

= 215.28

Denition 14.3: Producer Surplus

q

= S(q ) is dened as The producer surplus at the price-level of p CS = S(q)) dq. (p

Example 3.2 Producers Surplus

Find the producers surplus at a price level of $30 if the price-supply equation is S(q) = 5 + 0.01q2 . Solution

= 30 and we need to determine q. We can do this solving the equation p0 = S(q0 ). In this situation, we are given p 2 30 = 5 + 0.01q

= 50; therefore, the producer surplus, at the given Since quantity is a nonnegative measure, then it follows that q price-level, is found by determining the area bounded by the functions S(q) and p = 30 on the interval [0, 50].
50

This value $ 5000 3 $1666.67 represents the total amount gained by the producers who are willing to sell the product to the consumers at a lower price than $8.

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2 2500 = q (30 (5 0.01q2 )) dq =
0 50 q3 5000 + 25q = 0 3000 3

14.2. CONSUMER AND PRODUCER SURPLUS Consumer Surplus The total savings to the consumers who are willing to pay more than the given price ) = p for a product. of D(q Producer Surplus The total gain to the producers who are willing to supply a product at a price lower ) = p . than a given price S(q

is the equilibrium-price for D(q) and S(q), then there is stability between supply and demand. If p

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