BBA – Batch 2020-23

Semester - II
BM107.2: Business Economics
Session 1 - 7:
• Consumer Surplus
• Meaning
• Factors
• Equilibrium Diagram
• Examples
• Producer Surplus
• Meaning
• Factors
• Equilibrium Diagram
• Examples
• Total Surplus
• Equilibrium Diagram with Equilibrium
Quantity and Equilibrium Price

https://www.youtube.com/watch?v=ze1XRwb4hD8
Consumer Surplus
• It is the difference between the maximum
amount a consumer is willing to pay and actual
price paid by consumer. When Price Increases,
Consumer Surplus Decreases.

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Producer Surplus
• It is the difference between the price received by
the seller and minimum price a seller is willing to
accept.

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Demand and Supply Equilibrium
• Suppose that Demand Function is given by Qd = 20 – 2P where Qd is
Quantity Demanded (No. of Units) and P is Price (Rs.)
• Suppose that Supply Function is given by Qs = 5 + 3P where Qs is
Quantity Supplied (No. of Units) and P is Price (Rs.). Find out Equilibrium
Price and Equilibrium Quantity.

Equilibrium Point

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Class Practice 1 - Demand and Supply Equilibrium
• Suppose that Demand Function is given by Qd = 15 – 3P where Qd is
Quantity Demanded (No. of Units) and P is Price (Rs.)
• Suppose that Supply Function is given by Qs = 3 + 3P where Qs is
Quantity Supplied (No. of Units) and P is Price (Rs.). Find out Equilibrium
Price and Equilibrium Quantity.
• Find Consumer Surplus and Producer Surplus

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Class Practice 2 - Demand and Supply Equilibrium
• Suppose that Demand Function is given by P = 80 – 2Qd where Qd is
Quantity Demanded (No. of Units) and P is Price (Rs.)
• Suppose that Supply Function is given by P = 20 + 3Qs where Qs is
Quantity Supplied (No. of Units) and P is Price (Rs.). Find out Equilibrium
Price and Equilibrium Quantity. Calculate Consumer and Producer
Surplus.
• Suppose that due to increase in income the Demand Equation becomes
P = 120 – 2Qd, find out Equilibrium Price and Equilibrium Quantity.
Calculate Consumer and Producer Surplus.

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Class Practice 3 - Demand and Supply Equilibrium (Shift)
• Suppose that Demand Function is given by Qd = 20 – 2P where Qd is
Quantity Demanded (No. of Units) and P is Price (Rs.)
• Suppose that Supply Function is given by Qs = 5 + 3P where Qs is
Quantity Supplied (No. of Units) and P is Price (Rs.). Find out Equilibrium
Price and Equilibrium Quantity.
• Suppose that New Demand Function is given by Qdn = 20 – 3P where
Qdn is New Quantity Demanded (No. of Units) and P is Price (Rs.). Find
out New Equilibrium Price and New Equilibrium Quantity.

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Qd = 20 – 2P Qs = 5 + 3P

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Solution Class Practice 3 - Demand and Supply Equilibrium (Shift)
• Equate the equations of New Demand and
Original Supply.
• Qdn = Qs
• 20 – 3P = 5 + 3P
• 20 – 5 = 3P + 3P
• 15= 6P
• P* = 2.5 Rs. (New Equilibrium Price)
• Put P = 2.5 in either New Demand or Original
Supply equation
• Qdn = 20 – 3(2.5) = Qdn = 12.5 (By putting P =
2.5 in New Demand Equation)
• Qs = 5 + 3(2.5) = Qs = 12.5 (By putting P = 3 in
Original Supply Equation)
• Qdn = Qs  Q* = 12.5 Units (New
Equilibrium Quantity)

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 New Equilibrium Point

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Class Practice 4 - Demand and Supply Equilibrium (Shift)
• Suppose that Demand Function is given by P = 80 – 2Qd where Qd is
Quantity Demanded (No. of Units) and P is Price (Rs.)
• Suppose that Supply Function is given by P = 20 + 4Qs where Qs is
Quantity Supplied (No. of Units) and P is Price (Rs.). Find out Equilibrium
Price and Equilibrium Quantity. Also, find Consumer and Producer
Surplus.
• Suppose that New Supply Function is given by P = 20 + 5Qsn where Qsn
is New Quantity Supplied (No. of Units) and P is Price (Rs.). Find out New
Equilibrium Price and New Equilibrium Quantity. Find out New
Consumer and Producer Surplus.

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Solution Class Practice 4 - Demand and Supply Equilibrium (Shift)

• Equate Original Demand and New Supply Equation

• Qd = Qsn = Q
• 80 – 2Q = 20 + 5Q
• 80 – 20 = 5Q + 2Q
• 60 = 7Q
• Q* = 8.57 Units (Equilibrium Quantity Qd = Qs = Q*)
• Put Q = 8.57 Units in any equation:
• P = 80 -2(8.57) = Rs. 62.85
• P* = 20 + 5(8.57) = Rs. 62.85 (Equilibrium Price P*)

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Class Activity 1 – Shift of Demand / Supply Curve and effect
on Consumer / Producer Surplus
Many changes are affecting the market for oil. Predict how each of
the following events will affect the equilibrium price and quantity in
the market for oil. In each case, state how the event will affect the
Consumer and Producer Surplus. Create a sketch of the diagram if
necessary.
1. Cars are becoming more fuel efficient, and therefore get more
miles to the gallon.
2. A war in the Middle East disrupts oil-pumping schedules.
3. The price of solar energy falls dramatically.
4. Chemical companies invent a new, popular kind of plastic made
from oil.

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 Practise Numerical
• Suppose that the Demand Function for a
certain product is given by Qd = 180 – 4P and
Supply Function is given by Qs = -10 + P.
Compute the Consumer Surplus, Producer
Surplus and Total Surplus.
• What would happen to Consumer Surplus,
Producer Surplus and Total Surplus if due to
rise in Income New Demand Function takes a
form of Qdn = 190 – 3P?

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 Practise Numerical
• Suppose that the Demand Equation is given by
P = 100 – 2Qd and Supply Equation is given by P
= 20 + 2Qs. Find out the Consumer Surplus (CS)
and Producer Surplus (PS) at Equilibrium Point.
(P is Price (Rs.), Qs is Quantity Demanded
(Units) and Qs is Quantity Supplied (Units))
• Suppose if due to decrease in income the
Demand Equation becomes P = 80 – 4Qd, Find
the new Consumer Surplus (CS) and Producer
Surplus (PS) at Equilibrium Point.

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 Solution:

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 Key Terms:

1. Consumer Surplus
2. Producer Surplus
3. Total Surplus
4. Y intercept of Demand Curve
5. Y intercept of Supply Curve
6. Equilibrium Point
7. Shift of Demand Curve
8. Shift of Supply Curve
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