6/23/2021 3.3 Consumer Surplus, Producer Surplus, and Deadweight Loss – UH Microeconomics 2019
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UH MICROECONOMICS 2019
CONTENTS
3.3 Consumer Surplus, Producer
Surplus, and Deadweight Loss
Learning Objectives
By the end of this section, you will be able to:
Contrast consumer surplus, producer surplus, and social surplus
Explain why price floors and price ceilings can be inefficient
ThePrevious:
familiar3.2demand
Price Ceilings
andand Price Floors
supply diagram holds within it the concept of economic
efficiency. One typical way that economists define efficiency is when Next: it is KEY
impossible
TERMS
pressbooks.oer.hawaii.edu/microeconomics2019/chapter/3-3-consumer-surplus-producer-surplus-and-deadweight-loss/ 1/7
, 6/23/2021 3.3 Consumer Surplus, Producer Surplus, and Deadweight Loss – UH Microeconomics 2019
to improve the situation of one party without imposing a cost on another. Con-
versely, if a situation is inefficient, it becomes possible to benefit at least one party
without imposing costs on others.
Efficiency in the demand and supply model has the same basic meaning: The econ-
omy is getting as much benefit as possible from its scarce resources and all the pos-
sible gains from trade have been achieved. In other words, the optimal amount of
each good and service is produced and consumed.
The demand and supply model emphasizes that prices are not only set by demand or
supply, but also by the interaction between the two. In 1890, the famous economist
Alfred Marshall wrote that asking whether supply or demand determined a price was
like arguing “whether it is the upper or the under blade of a pair of scissors that cuts
a piece of paper.” The answer is that both blades of the demand and supply scissors
are always involved.
Consumer Surplus, Producer Surplus, Social Surplus
Consider a market for tablet computers, as Figure 3.9 shows. The equilibrium price
is $80 and the equilibrium quantity is 28 million. To see the benefits to consumers,
look at the segment of the demand curve above the equilibrium point and to the left.
This portion of the demand curve shows that at least some demanders would have
been willing to pay more than $80 for a tablet.
For example, point (J) shows that if the price were $90, 20 million tablets would be
sold. Those consumers who would have been willing to pay $90 for a tablet (based
on the utility they expect to receive from it) were able to pay the equilibrium price
of $80, clearly received a benefit beyond what they had to pay. Remember, the de-
mand curve traces consumers’ willingness to pay for different quantities. The
amount that individuals would have been willing to pay, minus the amount that they
actually paid, is called consumer surplus. Consumer surplus is the area labeled F—
that is, the area above the market price and below the demand curve.
Previous: 3.2 Price Ceilings and Price Floors
Next: KEY TERMS
pressbooks.oer.hawaii.edu/microeconomics2019/chapter/3-3-consumer-surplus-producer-surplus-and-deadweight-loss/ 2/7
Home Read Sign in
Search in book …
UH MICROECONOMICS 2019
CONTENTS
3.3 Consumer Surplus, Producer
Surplus, and Deadweight Loss
Learning Objectives
By the end of this section, you will be able to:
Contrast consumer surplus, producer surplus, and social surplus
Explain why price floors and price ceilings can be inefficient
ThePrevious:
familiar3.2demand
Price Ceilings
andand Price Floors
supply diagram holds within it the concept of economic
efficiency. One typical way that economists define efficiency is when Next: it is KEY
impossible
TERMS
pressbooks.oer.hawaii.edu/microeconomics2019/chapter/3-3-consumer-surplus-producer-surplus-and-deadweight-loss/ 1/7
, 6/23/2021 3.3 Consumer Surplus, Producer Surplus, and Deadweight Loss – UH Microeconomics 2019
to improve the situation of one party without imposing a cost on another. Con-
versely, if a situation is inefficient, it becomes possible to benefit at least one party
without imposing costs on others.
Efficiency in the demand and supply model has the same basic meaning: The econ-
omy is getting as much benefit as possible from its scarce resources and all the pos-
sible gains from trade have been achieved. In other words, the optimal amount of
each good and service is produced and consumed.
The demand and supply model emphasizes that prices are not only set by demand or
supply, but also by the interaction between the two. In 1890, the famous economist
Alfred Marshall wrote that asking whether supply or demand determined a price was
like arguing “whether it is the upper or the under blade of a pair of scissors that cuts
a piece of paper.” The answer is that both blades of the demand and supply scissors
are always involved.
Consumer Surplus, Producer Surplus, Social Surplus
Consider a market for tablet computers, as Figure 3.9 shows. The equilibrium price
is $80 and the equilibrium quantity is 28 million. To see the benefits to consumers,
look at the segment of the demand curve above the equilibrium point and to the left.
This portion of the demand curve shows that at least some demanders would have
been willing to pay more than $80 for a tablet.
For example, point (J) shows that if the price were $90, 20 million tablets would be
sold. Those consumers who would have been willing to pay $90 for a tablet (based
on the utility they expect to receive from it) were able to pay the equilibrium price
of $80, clearly received a benefit beyond what they had to pay. Remember, the de-
mand curve traces consumers’ willingness to pay for different quantities. The
amount that individuals would have been willing to pay, minus the amount that they
actually paid, is called consumer surplus. Consumer surplus is the area labeled F—
that is, the area above the market price and below the demand curve.
Previous: 3.2 Price Ceilings and Price Floors
Next: KEY TERMS
pressbooks.oer.hawaii.edu/microeconomics2019/chapter/3-3-consumer-surplus-producer-surplus-and-deadweight-loss/ 2/7
