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| | Recall that the "consumer surplus" is the extra amount the consumer would have paid for a good, but saved because the sales price was lower. If you were willing to pay $20 to see a new movie but it cost you only $12, then your consumer surplus for that transaction is $8. The consumer surplus is an important example of how the free market and supply and demand bring wealth to a society: you are $8 wealthier because the free market lowered the price to $12. | | Recall that the "consumer surplus" is the extra amount the consumer would have paid for a good, but saved because the sales price was lower. If you were willing to pay $20 to see a new movie but it cost you only $12, then your consumer surplus for that transaction is $8. The consumer surplus is an important example of how the free market and supply and demand bring wealth to a society: you are $8 wealthier because the free market lowered the price to $12. |
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| − | There is a famous graphical description of the consumer surplus that shows up repeatedly on examples. It is worth learning and remembering: | + | There is a famous graphical description of the consumer surplus that shows up repeatedly on exams. It is worth learning and remembering: |
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| | [[Image:Consumer and Producer Surplus.png]] | | [[Image:Consumer and Producer Surplus.png]] |
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| − | The equilibrium is where the supply and demand curves intersect: P=$5 and Q=500 units. From there a dotted line can be drawn horizontally to the y-axis (Price). The demand curve above that line represents the people who are willing to pay more than $5 for the good. Some are willing to pay $6, $7, $8, $9 and even $10, as well as prices in between. But they can buy the good for only $5 since that is the free market price. So they enjoy their "consumer surplus," as the amount above $5 that they did not have to pay, and could keep as savings. The '''''total''''' consumer surplus is the sum of all the individual consumer surpluses, which is the entire above the P=$5 line and below the demand curve. It is equal to the area of the triangle formed by the P=$5 line on the bottom, the slanted demand curve, and y-axis on the left side. | + | The equilibrium is where the supply and demand curves intersect: P=$5 and Q=500 units. From there a dotted line can be drawn horizontally to the y-axis (Price). The demand curve above that line represents the people who are willing to pay more than $5 for the good. Some are willing to pay $6, $7, $8, $9 and even $10, as well as prices in between. But they can buy the good for only $5 since that is the free market price. So they enjoy their "consumer surplus," as the amount above $5 that they did not have to pay, and could keep it as savings. The '''''total''''' consumer surplus is the sum of all the individual consumer surpluses, which is the entire above the P=$5 line and below the demand curve. It is equal to the area inside the triangle formed by the P=$5 line on the bottom, the slanted demand curve, and y-axis on the left side. |
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| − | ''For Honors only'': There is an analogous "producer surplus" for the seller, which is the amount he obtained by selling more than he would have been willing to sell. The supply curve illustrates that the supplier would have been able to make a few units to sell at only $1, $2, $3 and $4, as well as prices in between. But he was able to sell those units at the equilibrium price of $5, so he earned more money on those units than he would have otherwise. He has a "producer surplus" that is the area above the supply curve but below the P=$5 line. It is shown as the lower triangle above. | + | ''For Honors only'': There is an analogous "producer surplus" for the seller, which is the amount he obtained by selling at a price higher than what he would have been willing to sell. The supply curve illustrates that the supplier would have been able to make a few units to sell at only $1, $2, $3 and $4, as well as prices in between. But he was able to sell those units at the higher equilibrium price of $5, so he earned more money on those units than he would have otherwise. He has a "producer surplus" that is the area above the supply curve but below the P=$5 line. It is shown as the area within the lower triangle above. |
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| | ==Example: Homeschool Dinner Event== | | ==Example: Homeschool Dinner Event== |