J Calc and Interp consumer surplus, producer surplus, and total surplus Flashcards
The equilibrium quantity and price lead to optimal allocation of resources because the allocation maximizes the difference between the cost of producing and the total value to consumers of the traded quantity of a good. Consumer surplus is the excess consumers would be willing to pay above what they actually pay for the equilibrium quantity of a good or a service and is represented by the triangle bounded by the demand curve, the equilibrium price, and the left-hand axis. For a linear demand cu
Consumer Surplus (Marginal D - P)
Difference between willingness to pay and price
Producer Surplus (TR - TVC production)
Producer surplus is the excess of the market price above the opportunity cost of production
Total Surplus
MB=MC, where Consumer surplus = Producer Surplus
Equilibrium Quantity
The efficient quantity of a good (where MC = MB) is also the Q production that max’s total consumer surplus and producer surplus which leads to the efficient allocation of resources because it maximizes the total benefit to society from production.
Demand curve is MB, supply curve is MC and their equilibrium brings about an efficient allocation of resources to the production of the good.
Obstacles to Efficiency and Deadweight Loss
Deadweight Loss: The reduction in consumer and producer surplus due to under or overproduction.
DWL underproduction: below D, above S
DWL overproduction: Below S, above D
Calculate Consumer Surplus
1/2 (market P x Qd)
Calculate Producer Surplus
1/2 (Market P x Qs)
