Now let's see what happens when we put Producer Surplus and Consumer Surplus together on the same graph. So, we're going to have this idea of economic surplus. An economic surplus is the sum of the consumer surplus and the producer surplus, alright? So it's going to be our total surplus here. Economic surplus, we're going to call it our total surplus as well, right? Total surplus. So when are we going to maximize surplus, right? We talk about maximizing a lot, maximizing profit, maximizing revenue, we want to maximize surplus as well here, and that's going to be when the market is in equilibrium. Okay? So when we have that equilibrium, that is when we are going to have maximum surplus. So let's look at that on the graph. Look at this, kind of standard supply and demand graph here. Right? We've got our price axis, our quantity axis, our downward demand, double d's, upward supply. Right? So what's going on here? We've got our maximum surplus in this case and I'm going to show you why in a second, but just to be clear, we have this price of P star, right? We are at equilibrium, we've got P star and Q star, our equilibrium price and equilibrium quantity and what do we have? At that price, our consumer surplus is going to be this purple area that I'm highlighting now, right. Everything below the demand curve but above price right? That's our consumer surplus, which I'll write out here, and now let's do the same thing with producer surplus. That's going to be everything below the price but above the supply curve, right, and that's going to give us this area in green. Right? So when we add the green area, the producer surplus, with the consumer surplus, that is where we get our total surplus or economic surplus, right? So this is the case where it's maximized, right? We're going to have the most area between the supply and demand curve when we're at equilibrium. So let's go ahead and see a situation where we're not at equilibrium, right? So we're going to have what's called a deadweight loss when we're not at equilibrium. So if we're not in equilibrium, it's called a deadweight loss, that that emerges here and that's comes from the inefficiency of not being at equilibrium. Right? So let's go ahead and look on this graph. We're going to see we've got these different prices right? We had our equilibrium price here, P star and Q star, right? But now let's go ahead and say that the price is set too low, right? And you as a consumer, you're like yeah, low price, I love it. This is great for us. Which is true, you're going to see that. Consumers do benefit from that, but let's see what happens in this situation. So quantity low here, I'm going to put as well. So I'm going to go ahead and label these boxes, these different areas of the graph. I'm going to call this area A, B, C, D. What do you think about this last one? I'm going to go with E. Sounds pretty good. Alright, so we've got those 5 different areas of the graph, kind of cut off by those dotted lines, right? So let's talk about consumer surplus and producer surplus in each of these situations, then we'll talk about deadweight loss. So first, at equilibrium, we've got our consumer surplus which is everything above the price, right? So our equilibrium price was right here, right? The P star. So we're going to have this area, and I wouldn't I suggest you don't go ahead shading everything because I'm going to be un coloring stuff and we're going to be making different areas out of this graph. So just kind of follow along here and see where I'm going. So that area is going to be our consumer surplus, right? A plus B. You're going to see is our consumer surplus. So I'm going to write it in here. A plus B is the area that makes consumer surplus there and let's go ahead and do the same thing with producer surplus. So producer surplus is everything below the price above supply curve, right, and that's going to give us this triangle, the one we're used to, right? So remember, in equilibrium, we've got our maximum economic surplus, which is everything is going to be surplus. So here C+E are all Producer Surplus in this case. Alright, so I'm going to go ahead and erase these colors and let's do the same thing, at the low price. So now let's talk about consumer surplus and producer surplus at PL, right? Now we're at that low price. So what are we going to see that's happening? Let's talk about consumer surplus first, right? You're like hey low price, I love it, let's go ahead and see what happened to producer surplus or excuse me consumer surplus. So in this case, it's going to be everything above the price of PL, right? So you might think at first that it's going to be this whole area here including B and D, right? That might be your first guess at what our consumer surplus is going to be, but that's not right because if you think about area B and D, those trades are not happening at the low price, right? If we're at this low price, let's think about this real quick, at this low price right here, the quantity exchanged is this quantity low, So those exchanges passed to the right that are happening in the area of BND, those didn't happen, right? And if the trade didn't happen, no surplus happened right? Because it has to the exchange has to happen for the surplus to exist, alright? So that is actually not going to be the area of our consumer surplus because B and D are not part of our surplus, right? Those exchanges didn't happen, there's no surplus there. So what we're going to see is that our surplus, our consumer surplus is going to be this area right here. A and C. Okay? So that area of B and D, those trades didn't happen and you can kind of guess what's going to happen with B and D in a second, alright?
Table of contents
- 1. Introduction to Macroeconomics1h 57m
- 2. Introductory Economic Models59m
- 3. Supply and Demand3h 43m
- Introduction to Supply and Demand10m
- The Basics of Demand7m
- Individual Demand and Market Demand6m
- Shifting Demand44m
- The Basics of Supply3m
- Individual Supply and Market Supply6m
- Shifting Supply28m
- Big Daddy Shift Summary8m
- Supply and Demand Together: Equilibrium, Shortage, and Surplus10m
- Supply and Demand Together: One-sided Shifts22m
- Supply and Demand Together: Both Shift34m
- Supply and Demand: Quantitative Analysis40m
- 4. Elasticity2h 26m
- Percentage Change and Price Elasticity of Demand19m
- Elasticity and the Midpoint Method20m
- Price Elasticity of Demand on a Graph11m
- Determinants of Price Elasticity of Demand6m
- Total Revenue Test13m
- Total Revenue Along a Linear Demand Curve14m
- Income Elasticity of Demand23m
- Cross-Price Elasticity of Demand11m
- Price Elasticity of Supply12m
- Price Elasticity of Supply on a Graph3m
- Elasticity Summary9m
- 5. Consumer and Producer Surplus; Price Ceilings and Price Floors3h 40m
- Consumer Surplus and WIllingness to Pay33m
- Producer Surplus and Willingness to Sell26m
- Economic Surplus and Efficiency18m
- Quantitative Analysis of Consumer and Producer Surplus at Equilibrium28m
- Price Ceilings, Price Floors, and Black Markets38m
- Quantitative Analysis of Price Ceilings and Floors: Finding Points20m
- Quantitative Analysis of Price Ceilings and Floors: Finding Areas54m
- 6. Introduction to Taxes1h 25m
- 7. Externalities1h 3m
- 8. The Types of Goods1h 13m
- 9. International Trade1h 16m
- 10. Introducing Economic Concepts49m
- Introducing Concepts - Business Cycle7m
- Introducing Concepts - Nominal GDP and Real GDP12m
- Introducing Concepts - Unemployment and Inflation3m
- Introducing Concepts - Economic Growth6m
- Introducing Concepts - Savings and Investment5m
- Introducing Concepts - Trade Deficit and Surplus6m
- Introducing Concepts - Monetary Policy and Fiscal Policy7m
- 11. Gross Domestic Product (GDP) and Consumer Price Index (CPI)1h 37m
- Calculating GDP11m
- Detailed Explanation of GDP Components9m
- Value Added Method for Measuring GDP1m
- Nominal GDP and Real GDP22m
- Shortcomings of GDP8m
- Calculating GDP Using the Income Approach10m
- Other Measures of Total Production and Total Income5m
- Consumer Price Index (CPI)13m
- Using CPI to Adjust for Inflation7m
- Problems with the Consumer Price Index (CPI)6m
- 12. Unemployment and Inflation1h 22m
- Labor Force and Unemployment9m
- Types of Unemployment12m
- Labor Unions and Collective Bargaining6m
- Unemployment: Minimum Wage Laws and Efficiency Wages7m
- Unemployment Trends7m
- Nominal Interest, Real Interest, and the Fisher Equation10m
- Nominal Income and Real Income12m
- Who is Affected by Inflation?5m
- Demand-Pull and Cost-Push Inflation6m
- Costs of Inflation: Shoe-leather Costs and Menu Costs4m
- 13. Productivity and Economic Growth1h 17m
- 14. The Financial System1h 37m
- 15. Income and Consumption52m
- 16. Deriving the Aggregate Expenditures Model1h 22m
- 17. Aggregate Demand and Aggregate Supply Analysis1h 18m
- 18. The Monetary System1h 1m
- The Functions of Money; The Kinds of Money8m
- Defining the Money Supply: M1 and M24m
- Required Reserves and the Deposit Multiplier8m
- Introduction to the Federal Reserve8m
- The Federal Reserve and the Money Supply11m
- History of the US Banking System9m
- The Financial Crisis of 2007-2009 (The Great Recession)10m
- 19. Monetary Policy1h 32m
- 20. Fiscal Policy1h 0m
- 21. Revisiting Inflation, Unemployment, and Policy46m
- 22. Balance of Payments30m
- 23. Exchange Rates1h 16m
- Exchange Rates: Introduction14m
- Exchange Rates: Nominal and Real13m
- Exchange Rates: Equilibrium6m
- Exchange Rates: Shifts in Supply and Demand11m
- Exchange Rates and Net Exports6m
- Exchange Rates: Fixed, Flexible, and Managed Float5m
- Exchange Rates: Purchasing Power Parity7m
- The Gold Standard4m
- The Bretton Woods System6m
- 24. Macroeconomic Schools of Thought40m
- 25. Dynamic AD/AS Model35m
- 26. Special Topics11m
5. Consumer and Producer Surplus; Price Ceilings and Price Floors
Economic Surplus and Efficiency
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