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ECON 201
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Microeconomics
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Efficiency
01 Consumer Surplus
Consumer Surplus
● Consumer's Willingness to Pay - the maximum amount that a consumer will pay for a good
(shown on demand curve).

● Consumer Surplus - the amount a consumer is willing to pay for a good minus the amount
they actually pay for it.

Consumer Surplus for Individuals

● In the diagram below, if the actual market price right now is $4, then the consumer surplus for
the first consumer is which we find by doing (willingness to pay) minus
(actual price paid).

● For the second person the consumer surplus is which we find by doing minus

● For the third person the consumer surplus is which we find by doing minus

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Total Consumer Surplus at Equilibrium

1
Total Consumer Surplus =  (Base)  ⋅  (Height)  ⋅  ( )
2

In the diagram above, the total consumer surplus is =

Example Problem

Example: Consumer Surplus

The willingness to pay for three consumers is provided below and the current market price of ice
cream is $5. Find the total consumer surplus.

Consumer Willingness to Pay (Marginal Benefit)

Mary $12
Mike $6
Barbara $4

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02 Producer Surplus
Producer Surplus
Producer surplus is the amount a producer receives for selling a good minus what they are
willing to sell it for (or the cost to make it)

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Producer Surplus for Individual Sellers

● In the diagram below, if the actual selling price is currently $20, the producer surplus for the
first seller is which we find by doing minus

● For the second seller, the producer surplus is

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Total Producer Surplus at Equilibrium

1
Producer Surplus = (base)  ∗  (height)  ∗  ( )
2

In the diagram above the total producer surplus is 15 * (50-20) * 1/2 =

Example Problem

Example: Producer Surplus

What is the total producer surplus if the current market price of printers is $90

Producer Willingness to Sell (Marginal Cost)

Jake $75
Jamal $80
Jenna $95

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03 Total Surplus
Total Surplus
● Total Surplus is consumer surplus plus producer surplus (plus change in government
revenue).

● Efficiency - when resources are allocated in a way that maximizes the total surplus
received by all members of society (consumers and producers). This occurs at equilibrium.

Total Surplus = Value to Buyers − Cost to P roducers

In the diagram above the total surplus at equilibrium is 15 * (80 - 20) * 1/2 =

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Example Problem

Example: Total Surplus

The demand equation is given by P = 80 - 2Q and supply is P = 20 + 4Q. What is the consumer,
producer and total surplus at equilibrium?

04 Marginal Benefit and Marginal Cost

Marginal Benefit and Marginal Cost
● Marginal Benefit is the additional benefit consumers get from consuming one extra unit of
a product. It is represented by the demand curve.

● Marginal Cost is the additional cost of producing one more unit for the seller. It is
represented by the supply curve.

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● Allocative (Pareto) Efficiency - when no one can be made better off without making
someone else worse off. Allocative efficiency is achieved when we are at equilibrium
(marginal cost = marginal benefit). Anything past that quantity is inefficient.

● In the diagram above, for any output less than 15 the marginal benefit is than the
marginal cost and there should be units produced to reach allocative efficiency

● In the diagram above, for any output greater than 15 that marginal benefit is than
the marginal cost and there should be units produced to reach allocative efficiency

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05 CS and PS with Taxes

Consumer Surplus and Producer Surplus with Taxes

Before Tax After Tax Change

Consumer Surplus

Producer Surplus

Government Revenue

Total Surplus

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● Deadweight Loss (DWL) - the change in total surplus as we go from equilibrium to the
new point (after tax). It is caused by the loss in consumer and producer surplus due to the
lower quantity being produced. The DWL is also called change in total surplus or change
in welfare

● The consumer and producer surplus before tax just means at equilibrium.

● Consumer surplus after tax - we only take the area above the consumer's price (which is
only triangle A) because only those consumers are still willing to buy the product (at a price of
$12)

● Producer surplus after tax - we only take the area below the producer's price (which is
triangle F) because only those producers are still willing to sell the product (receiving only $8).

● Government Revenue - this is the tax multiplied by the new quantity ($4 * 15) which is the
rectangle B and D.

Example Problem

Example: Tax and Elasticity

Would the Deadweight Loss (DWL) be bigger or smaller in the following situations:

1. Inelastic Supply

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If supply is inelastic the deadweight loss will be because the equilibrium quantity will
fall by only a little bit.

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2. Inelastic Demand

If the demand is inelastic the deadweight loss will be because the equilibrium quantity
will fall by only a little bit.

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3. Elastic Supply

If the supply is elastic the deadweight loss will be because the equilibrium quantity will fall
by a lot.

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4. Elastic Demand

If demand is elastic the deadweight loss will be because the equilibrium quantity will fall by
a lot.

Laffer Curve

True or False? Increasing the size of the tax will always increase tax revenue -

● If the size of the tax is very high, eventually consumers will not be able to afford the product
and the amount sold would fall by a lot so the government would end up collecting less in tax
revenue.

● Alternatively if the size of the tax is very low, consumers will buy a lot of the product but the
government will make very little in tax per unit so tax revenue will be low.

● Therefore a medium tax will usually result in the highest tax revenue for the government.

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Laffer Curve - a curve that shows how tax revenue varies with the size of the tax. In the graph
below we can see when the size of the tax is in the middle (medium tax) that is the point where the
government collects the maximum tax revenue (at a tax size of 20 and tax revenue of $200).

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06 CS and PS with Price Ceilings

CS and PS with Price Ceilings

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Producer Surplus

● A general rule for producer surplus is that it is always below the price producers are
receiving but above the supply curve (only until the quantity being sold).

● In the diagram above, the producer surplus with the price ceiling is

Consumer Surplus

● A general rule for consumer surplus is that it is always above the price consumers are
paying but below the demand curve (only until the quantity being sold).

● The consumer surplus is

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Deadweight Loss

● Deadweight Loss (DWL) - also called change in total surplus or change in welfare as we
go from equilibrium to the new point with the government intervention. It is caused by the loss
in consumer and producer surplus due to the lower quantity being produced.

● DWL is always a triangle between the old equilibrium and new equilbrium quantities.

● The DWL is

Example Problem

Example: CS, PS, DWL with Price Ceiling

Suppose the demand is P = 250 - 3Q and supply is P = 50 + Q. If there is a price ceiling of $90,
what would be the consumer surplus, producer surplus and deadweight loss?

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07 CS and PS with Price Floors

CS and PS with Price Floors

● In the diagram above the consumer surplus is the area above the price floor but below the
demand which is

● Producer surplus is the area below the price floor but above the supply which is

● DWL is the triangle between the original equilibrium quantity and the new quantity which is

Example Problem

Example: CS, PS, DWL with Price Floors

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Suppose the demand is P = 250 - 3Q and supply is P = 50 + Q. If there is a price floor of $130, what
would be the consumer surplus, producer surplus and deadweight loss?

08 CS and PS with Quotas

CS and PS with Quotas

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● Consumer surplus is the area above the price (remember in a quota the price is where the
new quantity hits the demand curve) but below the demand which is

● Producer surplus is the area below the price but above the supply which is

● DWL is the triangle between the old and new equilbrium quantity which is

WIZ E T IP

The consumer surplus, producer surplus and DWL for quotas and price floors are exactly
the same! This is because both graphs lead to lower output and higher price.

Example Problem

Example: CS, PS, DWL with Quotas

Suppose the demand is P = 250 - 3Q and supply is P = 50 + Q. If there is a quota of 40, what would
be the consumer surplus, producer surplus and deadweight loss?

09 CS and PS with Subsidies

CS and PS with Subsidies

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● Consumer surplus is above the consumer's price ($48) but below the demand which is

● Producer surplus is below the producer's price ($52) but above the supply which is

● Cost to government is the subsidy multiplied by the new quantity which is

● DWL is the triangle between the old equilibrium quantity and the new quantity which is

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