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Course: Microeconomics > Unit 4
Lesson 1: Consumer and producer surplus- Demand curve as marginal benefit curve
- Consumer surplus introduction
- Total consumer surplus as area
- Producer surplus
- Equilibrium, allocative efficiency and total surplus
- Lesson Overview: Consumer and Producer Surplus
- Consumer and Producer Surplus and Allocative Efficiency
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Total consumer surplus as area
Consumer surplus is calculated by finding the difference between the amount a consumer is willing to pay for a product and the actual price they pay. To find the total consumer surplus, you sum up these differences for all units sold. In some cases this can be simplified to finding the area between the demand curve and the price line. Created by Sal Khan.
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How do firms figure out consumer surplus? Wouldn't it take one massive market study to figure out how much people were willing to spend for a product?(32 votes)
This is an incredibly complex process with lots of moving parts that might happen in lots of different ways depending on whether there is an existing product or not. In general, companies don't set out to find out the consumer surplus directly, they generally set out to find out what price they could charge for a particular product in a particular market and what volume they could sell, they then balance that against their cost is to deliver that product - they generally call it a pricing, market or feasibility study. The model they construct based on the research to show them the price/volume trade off will also be a consumer surplus model but they're most likely not thinking about it like that.(41 votes)
- Would firms try to minimize consumer surplus in order to maximize profits? Are the two inversely related, ie would more consumer surplus mean less profits?(6 votes)
- Regarding surplus and profit: There is no clear relation there. Imagine you sell phones and you can either sell one a week for 100, or 10 a week for 90. Let's say for simplicity that for any price between 90 and 100 you are still able to sell only 1 phone. So, if you were selling for 100, your total surplus would be zero, but if you are selling for 90, your total surplus is 10. But what is your profit? Well, that depends on your costs. If your costs are say 50 per phone, then if you sold one for 100 you would earn 50 a week, but if you sold 10 for 90, your profit would be 400/week.
Now if your costs are 89/phone, then by selling 1 for 100 you earn 11, bur if you sold 10 for 90 you earn only 10, so now a different option is more profitable, but the surplus situation did not change. If your costs are above 90 the change is even more obvious.(26 votes)
- If you had applied this method to the previous video, the total consumer surplus would have been 80 instead of 60. It seems you're neglecting to draw in that little right triangle that's between the top of the rectangle (drawn arount2:00on this video) and the demand curve. Which meathod is correct? Because this seems more like an estimation.(5 votes)
- That is because the method in this video is used for bigger markets (since almost no markets are as small as 1, 2 or 3 consumers). In the bigger markets, it is therefore easier to calculate a consumer surplus this way without caring about the "space" between 0 and 1 orange sold, since that space plays such a small part in the bigger picture.(7 votes)
- Could you use calculus to find the quantity of oranges sold to get the maximum profit?(5 votes)
Yes, but calculus is much more difficult and more work, better use algebra to work out linear curves. You'll want to use calculus for non linear curves though.(2 votes)
- What are some ways firms use to reduce consumer surplus and maximize profits by using price discrimination? Some ways I thought of; by offering optional coupons or rewards programs for those wanting to pay less, senior or student discounts, bids and auctions and then offering second chances for the losing bids, by never disclosing a fixed price tag and instead giving qoutes based on each individual customer, waiting for customer offer and then adjusting price base on that. Are these all tactics to maximize profits, what are some other ways of price discrimination?(3 votes)
- All the methods you mention are tactics of price discrimination which increases profits through minimizing consumer surplus. There are some types of industries that do a very good job at this. For example, airlines change ticket prices all the time based on who they think is buying tickets 3 months in advance (families travelling) vs. 3 days in advance (businessmen who are willing to pay much more).(6 votes)
- where did you get 3.30 and 1.30?(2 votes)
- Like this: The person who bought the 100th pound of oranges would have been willing to pay $3.30 for them. However, the price was $2. Their consumer surplus is what they were willing to pay minus the price, or $3.30 - $2, which is $1.30.
Hoped that helped!(3 votes)
What would be the consumer surplus for a person whose marginal benefit would be $1 for 100 lbs. of oranges?(2 votes)
Great question. Well when you say "marginal benefit" I'm assuming you're talking about marginal "utility". So what you're looking at is the satisfaction that the consumer gets from the "next" product, which in this case you're using price to point it on the graph, so the consumer's marginal utility at $1 is the quantity of 150 lbs. which is at price of $3.
more on marginal utility :
https://www.khanacademy.org/economics-finance-domain/microeconomics/choices-opp-cost-tutorial/marginal-utility-tutorial/v/marginal-utility
but if you're looking at the quantity and specifically at 100 lbs., then the marginal utility (satisfaction) is 1.30 as Sal said.
Cheers(2 votes)
- At0:07, Sal says you can look at the curve as a marginal benefit curve or as a demand curve? Are they the same thing or do they have some difference between them? Can someone please explain this to me. Thanks.(1 vote)
- same thing. A marginal benefit curve is a demand curve as a marginal cost curve is a supply curve.(4 votes)
At5:05, you say: 1/2 x 300 x 2
Where did you get the 1/2 from?
Thank you very much and I like your videos(2 votes)
Conceptually, what is "Total Surplus" in non-mathematical terms?(1 vote)
I think it's easier to understand—even conceptually—by breaking it into consumer surplus and producer surplus.
Consumer surplus is the difference between what consumers were willing to pay (represented by the demand curve) and what they actually paid (represented by the price). This consumer surplus is the area—usually a triangle—between the demand curve, price, and the y-axis.
Producer surplus is the difference between what producers were willing to accept (represented by the supply curve) and what they actually got (represented by the price). This producer surplus is the area—usually a triangle—between the supply curve, the price, and the y-axis.
Total surplus is simply the sum of consumer surplus and producer surplus.
When you introduce externalities things get a bit messier, but hopefully this explanation helps you understand it conceptually.(2 votes)
2:00Video transcript
Let's say you run
an orange stand. And this right here,
you could view this as either the demand curve
for your orange stand or your marginal benefit
curve, or really you could call it the
willingness to pay, the first 100 pounds of oranges. Or that very 100th
pound, someone would be willing to
pay $3 per pound. But then the 101st pound would
be a little bit less than that. So that's the
willingness to pay, or the marginal benefit
of that incremental pound. But let's say you decide
to set the price at $2, and you are able to sell
300 oranges in that week. What I want to
think about is, what is the total consumer surplus
that your consumers got? And the way to think
about consumer surplus is, how much benefit did they
get above and beyond what they paid? So for example, the
person who bought-- let's just think about
the exact 100th pound. The 100th pound, they paid $2. They paid $2, but their
benefit looks like it was, I don't know, $3.30. But they only paid $2. So their benefit on that
one pound, their benefit, or I should say their
consumer surplus, is going to be
$3.30 minus a $2.30. So that person who bought that
100th-- not all the 100 pounds, just that 100th pound-- got a
consumer surplus of $3.30 minus $2, which is a $1.30
consumer surplus. So if you wanted to figure out
the entire consumer surplus, well, you just have to do
it for all of the pounds. So that was 100th pound. So essentially,
you could view this as the area of this little
thing right over here. And let me zoom in,
just to make sure you understand what's going on. That thing that I just
drew, if we zoom in, will look something like this. It was one pound wide. And this right over here was $2. And then we had our marginal
benefit curve, or our demand curve, sloping down like that. And this point right
over here was $3.30. And so to figure out the
consumer surplus for that pound we said, OK, for that pound
they were willing to pay $3.30. The benefit to them was $3.30. But they only had to pay $2. So the height of this
right over here was $1.30. And so the consumer surplus
is $1.30 per pound times one pound. And so that's where we got
the $1.30 consumer surplus. Now, we could do that for
every one of the pounds. So we could do that
for the 101st pound. Let me get a different color. The 101st pound, we
would do it like that. Then the 102nd pound, we
would do it like that. 103rd pound like that. We'd do it for the
99th pound like that. And so you could
imagine if we wanted to find the total consumer
surplus, what are we doing? Well, we're essentially
just finding the area between
our demand curve and this line where the
price is equal to 2. So we're just going
to sum up this area. And if you're familiar
with calculus, you might know that
you can actually make these things
arbitrarily small. You don't have to take a
one pound wide rectangle. You get a half a
pound wide rectangle, or a quarter pound
wide rectangle. Then you'll just
have more rectangles. It doesn't matter so much if
you have a linear demand curve, but if you had a
non-linear demand curve then it would matter. You'd want to get smaller and
smaller and smaller, or thinner and thinner and
thinner rectangles, so you could get better
and better approximations for the consumer surplus. But needless to say, what
you're really doing-- especially if you get unbelievably
thin rectangles, and you have an unbelievably
high number of them-- you're really just estimating the
area under the demand curve and above the price equals $2. And so if you want to know
this consumer surplus-- and I really want you to
understand why this was. I mean, just think
about it for each pound. It was just how much
more value that pound, whoever bought that pound,
how much more value do they get relative to what they paid. And we're just summing that
up across all of the pounds. So to really figure out
the total consumer surplus, we just have to find this
area of this blue area. And that's just finding
the area of a triangle. So this right over here,
you have a base of 300. This length right over
here is 300 pounds. And then our height over here. And we can just use this
as the area of a triangle, because this is a simple
linear demand curve. We would actually have to
use a little bit of calculus if this was a non-linear curve. But the height here is 2. So our area, the area between
the demand curve and our price equals 2, is equal to 1/2
times base times height. 1/2 times the base, which is 300
pounds, times the height, which is $2 per pound. The pounds cancel out. 1/2 times 2 is 1,
times 300 is 300. So we get 300. And all we're left
with is dollars. So the total consumer
surplus in this case is $300. And it really is just the
area between the demand curve and this price equals 2
line right over there.