Consumer Surplus (CS), Producer Surplus (PS), Total Surplus (TS), & Deadweight Loss (DWL)

Consumer Surplus (CS), Producer Surplus (PS), Total Surplus (TS),& Deadweight Loss (DWL)

Do You Know How to Calculate on a Graph …? • Consumer Surplus (CS) • Producer Surplus (PS) • Total Surplus (TS) • Deadweight Loss (DWL)

CS, PS, TS, & DWL $ Given the D & S curves in a market as shown, 12 10 S 8 6 4 2 D 200 400 600 Q

CS—The Benefits to Buyers (Equivalent to Bargain/Saving) $ CS is the shaded triangle. Its value equals the area ofthe triangle, or half or a rectangle. The formula is: area = base x ½ height.So CS = (300 x ½ x (12-6)) = $900. 12 10 S 8 6 4 2 D 200 400 600 Q

PS—The Benefits to Sellers(Equivalent to Gross Profit) $ PS is the shaded triangle. Its value equals the area ofthe triangle.So PS = base x ½ height = (300 x ½ x (6-2)) = $600. 12 10 S 8 6 4 2 D 200 400 600 Q

TS = CS + PS = Maximum(TS Is Maximized in a Free Market) $ In a free market, TS, the sum of CS and PS, measures the total maximum benefits to all market participants. TS = CS + PS = $900 + $600 = $1,500. 12 10 S 8 6 4 2 D 200 400 600 Q

DWL $ Given the D & S curves, suppose that the government imposed a per-unit tax (T) on the market as shown. What would happen? 12 10 S 8 6 4 2 D 200 400 600 Q

TS = CS + PS < Maximum (DWL Is the Loss/Reduction in TS) $ CS would decrease; PS would decrease; GTR would rises, TS would decrease; and a DWL would exist. 12 CS aftertax 10 S 8 GovernmentTax Revenue(GTR) DWL GTR = $3 x 200 = $600; andDWL = ½ x 3 * 100 = $150 6 PS aftertax 4 2 D 200 400 600 Q

Now You Know How to Calculate on a Graph … • Consumer Surplus (CS) • Producer Surplus (PS) • Total Surplus (TS) • Deadweight Loss (DWL)

See You! Take Care!

Consumer Surplus (CS), Producer Surplus (PS), Total Surplus (TS), & Deadweight Loss (DWL)