ATA CHAPTERS ~ Applications of integration ® Given demand and supply functions, find the ‘consumer surplus and ‘the producer surplus at ‘the equilibrium point, OBJECTIVE f TECHNOLOGY CONNECTION [= EXERCISE 1. Graph the demand and supply functions Di) 5) and S(x) = hx 43 using the viewing window [0,5 0, 30), with Yscl = 5 Find the equiibeisn point sing the INTERSECT feature sorplas $8.75) Units per month (average ntber of movies) FIGURE1 An Economics Application: Consumer Surplus and Producer Surplus Iwhas been convenient to think of demand and supply as quantities that are functions of price. For purposes of this section, we will find it convenient to think of them as prices that are functions of quantity: p = D(x) and p = 5(x). Indeed, such an interpre- {ation is common in economics. We can use integration to calculate quantities of interest co economists, such as consumer surplus and producer surplus ‘The consumers demand curve is the graph of p = D(x), which shows the price per whit that the constimer is willing to pay for units of a product. I is usually a de- creasing function since the consumer expects to pay less per unit for large quantities of the product. The producer’ supply curve isthe graph of p = S(x), which shows the price per unit the producer is willing to accept for selling x anits. Its uswally an in- creasing function since a higher price per unit is an incentive for the producer to make ore units available forsale. The equiibriuun point (x, pp) isthe intersection of these to curves Price Quantity Utility is a function often considered in economics. When a consumer receives x units of a product, a certain amount of pleasure, or utility, U, is derived from them (see Exercise 27 in Exercise Set 1.3). For example, the number of movies that you see ina month gives you a certain utility. If you see four movies (unless they are not enter taining), you get more ucility than if you see no movies. The same notion applies to hhaving a meal in a restaurant or paying your heating bill to warm your home. To help to explain the concepts of consumer surplus and producer surplus, we will consider the utility of seeing movies over a fixed amount of time, say, 1 month. We are also going to make the assumption that the movies seen ate of about the same quality. Samantha is a college student who likes movies. Ata price of $10 per ticket, she will see no movies. Ata price of $8.75 per ticket, she will see one movie per month, andl at a price of $7.50 per ticket, she will see two movies per month, As the price per ticket decreases, Samantha tends to see more movies. As long as the number of movies (x) {s small, Samantha’s demand function for movies can be modeled by p = 10 ~ 1.25%. ‘We want to examine the utility she receives from going to the movies. Aca ticket price of $8.75, Samantha sees one movie, Her total expenditure is (1)$8.75 = $8.75, as shown by the blue region in Fig. 1. However, the area under Samantha’ demand curve over the interval [0, 1] is $9.38 (rounded). This is what going to one movie per month is worth to Samantha—that is, what she is willing to pay. Since she spent $8.75, the difference in area, represented by the orange triangle, 59.38 — $8.75 = $0.63, can be interpreted as the pleasure Samantha gets, but does not have to pay for, from the one movie, Economists define this amount as the consumer surplus. Iv is the extra wiility that consumers enjoy when prices decrease as more units are purchased,51+ An Economics Application. Consumer Surplus and Producer Surplus 473 Suppose Samantha goes to two movies per month at $7.50 per ticket. Her total asu expenditure is (2)$7.50 ~ $15.00, which is represented by the blue region in Fig. 2 ™ ‘The area under Samantha demand curve over the interval |0, 2] is $17.50. Therefore, $750) Samantha's consumer sueplis is $2.50, which measures the pleasure Samantha P= D0) received, but did not have to pay for, rom the two movies, Total expendire Suppose that the graph of a demand Price function is a curve, as shown at the right. . Consumer spas ros Units per month (average numberof movies) ol expedtse FIGURE 2 Ps ee bo If Samantha goes to Q movies when the price is P, then her total expenditure is QP The total area under the curve is the total wality, or the total enjoyment received, and is [ “D(x) de ‘The consumer surplus is the total area under the curve minus the total expenditure, This surplus is the total wulity minus the total cost and is given by [ “plx) ax - OF DEFINITION ‘Suppose that p = D(x) describes the demand function for a commodity Then the consumer surplus is defined for the point (Q, P) as [ “Do dx — OP, MLEXAMPLE 1 Find the consumer surplus for the demand function given by D(x) = (x = 5) when x = 3 Solution When x = 3, we have D(3) = (3 ~ 5)* = (~2)? = +. Then 00) = = 58 wos [en sjtac Somes 527 Consumersurplas = ff (x — 5)Pdk — 3-4 Expenditure = 3658) = $12 rn = [ot- rorya weed “5 : ° > Quick check = [(F-s07 +9) - (Ss: = 2509) Fee eee fetter ieee erent by D(x) = x? - 6x +16. when x = 1. (Quick Check 1. = (9-45 +75) -0-2 27476 CHAPTERS - Applications of tegration Exploratory Graph D(x) = (x — 5)4, the emund neon ange sing the eng wn To SOT wi t= 5 Tod Ihevonsune supe ate 3 ‘we first find D(3), Then we graph Ja Dts) Wwistlshe paneer Ineo ely = BOD and y= DB)? From the intersection se RaW costes cca tin down to the x-axis, What does the atea of the resulting rectangle represent? What does the area above the horizontal line and below the eurve represent? Lets now look at a supply curve for a movie theater, as shown in Figs. 3 and 4. Suppose the movie theater will not sell tickets to a movie for any price at or below $4 (because this would not be enough to cover operating costs and return a profit), but will sell one ticket for one movie at $5.75 or two tickets for two movies at $7.50 each, For small numbers of movies (x), the theater's supply curve is modeled by p ~ 4+ 175x. ‘The price $5.75 is within what Samantha is willing to pay for one movie, and the theater will ake ina revenue of (1)$5.75 ~ $5.75 for selling Samantha tone ticket for one movie. The area of the yellow region in Fig. 3 represents the total per- person cost to the theater for showing one movie, which is $4.88 (rounded). Since the theater takes in $5.75 for selling one ticket, the difference, $5.75 — $4.88 ~ $0.87, represents the surplus over cost and is a contribution toward profit for the theater Economists call this the producer surplus, Itis the benefit a producer receives when, supplying more units at a higher price than the price at which the producer expects to sell units. Its the extza revenue the producer receives as a result of not being forced to sell fewer units ata lower price Ava price of $7.50, the theater will show Samantha 2 movies and collect total receipts of 2(S7.50), or $15. The area of the yellow region in Fig. 4 represents the total cost to the theater of showing Samantha 2 movies, which is $11.50. The area of the green triangle is $15.00 — $11.50 ~ $3.50 and is the producer's surplus. It is a conti bution to the theater's profit, Price sof Producer surplis so Producer surplus $7530) Total eceipts ro? + se Unite per month Uns per month (average numer of movies) (average mime of movies) FIGURE 3 FIGURE 4 Suppose that the graph of the supply function isa PSEA producer curve, as shown at the right, If the theater shows surplus Samantha @ movies when the price is P, the total Sex) receipts are QP. The producer surplus is the total receipts minus the area under the curve and is given by ar [ "stoi Tat DEFINITION Suppose that p= S(x) is the supply function for a commodity Then the producer surplus is defined for the point (0, P) as or [ *ste) deMLEXAMPLE 2. Find the producer surplus for S(x) Lona receipe 5815) = 545 » Quick Check 2 [Find the producer surplus for S(x) ier eee ene onsen soups FIGURE 5 51+ An Economics Application. Consumer Surplus and Producer Surplus 477 Ox + 3.whenx Solution When x = 3,5(3) = 3? +3 +3 = 15. Then 6-[E+Saa) #-[E-Z+)-@+$+20)] 4s-(o4240-0 ° 2 $22.50, ( Quick Check 2 The equilibrium point (xz, pz) in Fig. 5 is the point at which the supply and de- mand curves intersect, It is the point at which sellers and buyers come together and purchases and sales actually occur Let’ reconsider the example involving Samantha and the movie theater. When, the theater charged $5.75 for one ticket, Samantha saw one movie. Since seeing the movie was worth $9.38 to Samantha, she derived $9.38 ~ $5.75 = $3.63 in utility, To Samantha, this was a very good deal, since she paid much less than she was willing to pay. However, the theater lost potential reventie by “undercharging” Samantha. We sce in Fig. 6 that at a price of Price. $7.50 per ticket, Samantha’ demand SE oe) eto tase curve and the theaters supply carve 10 intersect. This point is advantageous Consumer for both Samantha and the theater, PM E150) since Samantha is willing to see (wo ‘ oducer movies at a price of $7.50 per ticket, sap BAN. while the theater can increase its sur. afm msi plus by selling the two tickets. to 3 Samantha, In other words, i the price i per licket is set too low, the theater will certainly sell tickets but will lose of een revenue it could be receiving if the FIGURE 6 price were set slightly higher, since Samantha (and the general population) are willing to pay more according to the demand curve. On the other extreme, if the theater sets the price too high, it sim- ply will not sell enough tickets to make a profit. The $7.50 ticket price is the best “middle ground” for producer (the theater) and consumer (Samantha) alike.AB CHAPTERS ~ Applications of Integration MLEXAMPLE 3. Given D(x) = (w= 5)P and S(x) =P +x +3. find each of the following Price $30 a) The equilibrium point 3 b) The consumer surplus at the 20 equilibrium point sauna ©) The producer surplus atthe : equibrium point ede Solution a) To find the equilibrium point, we set D(x) ~ (x) and solve: (e- SP ax txt lox b= bes lox $25 =x 43 22 = Lx d=x Thus, x; ~ 2. To find pp, we substitute xp into either D(x) or S(x). Ifwe choose D(x), we have Pe = D(xe) = P(2) 5) (37 $9, ‘Thus, the equilibrium point is (2, $9) b) The consumer surplus at the equilibrium point is [rw be ~ ype, cs [en sha-2 os ©) The producer surplus at the equilibrium point is, aimee [sea> Quick check 3 Given D(x) = x? = 6x + 16 and S(x) = fx + x + 4, find each of the following Assume x = 5 a) The equilibrium point }) The consumer surplas at the elibrsen point ) The producer surplus at the equilibrium point «Quick check Section Summary ‘+ A demand curve isthe graph of a function p = D(x) which represents the unit price p a consumer is willing to pay for x items. ILis usually a decreasing function ‘+ A supply curve is the graph of a function p = S(x), which represents the unit price pa producer is willing to accept for x items, It is usually an increasing function. + Consumer surplus ata point (Q, P) is defined as [ra - er + Producer surplus ata point (QP) is defined as ow [sto In each of Exercises 1-14, D(x) isthe price, in dollars per unit, that consumers are willing to pay for x units of an item, and 8(x) isthe price, in dollars per unit, that producers are willing to accept for x units. Find (a) the equilibrium point, (b) the consumer surplus at the equilibrium point, and (¢) the producer surplus atthe equilibrium point 1. Dlx) S(x) =4e+1 2. Dlx) = 3x +7, Sfx) = ak 2 3. D(x) Si) =P + 2+ 6 4. D(a) = (x= 3), Sx) = eT 5. D(x) = («— 6), 6. D(x) = (x - 8), 7. Dlx) = 1000 = 10x, (x) = 250 + 5x 8. D(x) = 8800 — 30x, (x) = 7000 + 15 9, Dlx) =5 —x,for0 Sx 55; Sfx) = VasT 10, D(x) = 7 — x for0 SxS 7 Sx) = 2VE4T brercse Sets 479 «The eqilbvium pin (px) 8 the pont at which che suppl and demand curves intersect The constiner surpls a the equlibrta pointis [re ~ eRe ‘The producer surplus at the equilibrium point is xePe ~ [ * s(x) a ML Ds) = SE. ste) = Ve 12. D(x) S(x) =2VE40 Vert 1B. Dix) = (x4), SQ) Ha tess 14, D(x) = 13 - x ford Sx 13, Six) = VET TT SYNTHESIS For Exercises 15 and 16, follow the directions given for Exercises I-14 15, Dlx) = 9, (x) = 16, D(x) = V5e—% Six) =x NG17, Explain why both consumers and producers feel good when consumer and producer surpluses exist cts, Do some research on consumer and produce sutpluses inn economics book Wee a bre desripon