Consumer and Producer Surplus---Graphing and Calculating

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Consumer and Producer Surplus : Consumer and Producer Surplus Determining Social Welfare

PowerPoint Presentation : D* S* Price Of ___ Quantity of ____ Qe Pe Markets establish prices and quantities and efficient allocation of resources. This results in benefits for Consumers (Demand) and Supplier s(Supply)

PowerPoint Presentation : D* S* Price Of ___ Quantity of ____ Qe Pe CS The shaded area is the area of Consumer Surplus —Everything above the Equilibrium Price line and below the demand curve .

PowerPoint Presentation : D* S* Price Of ___ Quantity of ____ Qe Pe CS Consumer Surplus —The amount a BUYER is willing to pay for a good MINUS the amount a buyer ACTUALLY pays for it.

PowerPoint Presentation : D* S* Price Of ___ Quantity of ____ Qe Pe CS I might be willing to PAY P1 and my Quantity Demanded may be Q1, , But I don’t have to pay P1 because I can get what I want at the lower price of Pe . P1 Q1

PowerPoint Presentation : D* S* Price Of ___ Quantity of ____ Qe Pe CS If I went into a store and EXPECTED to pay P1 and had to pay only Pe , then that Means I can now spend money on something else I am better off . P1 Q1

PowerPoint Presentation : D* S* Price Of ___ Quantity of ____ Qe Pe The shaded area is the area of Producer Surplus —Everything BELOW the Equilibrium Price line and ABOVE the Supply Curve . PS

PowerPoint Presentation : D* S* Price Of ___ Quantity of ____ Qe Pe PS Producer Surplus —The difference between the market price and the price that firms would be willing to supply a good.

PowerPoint Presentation : D* S* Price Of ___ Quantity of ____ Qe Pe The Producer may be willing to supply Q1 at a price of P1 but they don’t have to Because the market price is Pe . Does not have to sell at a lower price. PS P1 Q1

How does this levying of a PER-UNIT tax on the SUPPLIER affect Consumer and Producer Welfare : How does this levying of a PER-UNIT tax on the SUPPLIER affect Consumer and Producer Welfare

PowerPoint Presentation : D* S* Q e P e Price Of ___ Quantity of ________ B A Q 1 P 1 . . Supply Curve shifts up by the amount of the tax (Cost of Production INCREASES) S1

PowerPoint Presentation : D* S* Q e P e Price Of ___ Quantity of ________ S1 B A Q 1 P 1 . . Area of Consumer Surplus LOST Area of Producer Surplus LOST The sum of lost C.S. and P.S. is called Dead Weight Loss (DWL) DEAD WEIGHT LOSS : The loss in Consumer and Producer Surplus due to inefficiency because some transactions cannot be make and therefore their value to society is lost. In other words, society loses the quantity Qe – Q1 they could have “enjoyed” at the lower prices between P1 and Pe .

PowerPoint Presentation : D* S* Q e P e Price Of ___ Quantity of ________ S1 B A Q 1 P 1w/TAX Price Consumer Pays . . Area of Consumer Surplus LOST Area of Producer Surplus LOST The sum of lost C.S. and P.S. is called Dead Weight Loss (DWL) P 2 (P1-P2) Producer receives Area of TAX REVENUE (P 1 –P 2 ) X Q 1 Amt. of TAX

PowerPoint Presentation : D* S* Q e P e Price Of ___ Quantity of ________ S1 B A Q 1 P 1w/TAX Price Consumer Pays . . Area of Consumer Surplus LOST Area of Producer Surplus LOST The sum of lost C.S. and P.S. is called Dead Weight Loss (DWL) P 2 (P1-P2) Producer receives Amt. of TAX Who bears the burden of the TAX? The Consumer or the Producter?

PowerPoint Presentation : D* S* Q e P e Price Of ___ Quantity of ________ S1 B A Q 1 P 1w/TAX Price Consumer Pays . . Area of Consumer Surplus LOST Area of Producer Surplus LOST The sum of lost C.S. and P.S. is called Dead Weight Loss (DWL) P 2 (P1-P2) Producer receives Amt. of TAX It depends on ELASTICITIES!!

PowerPoint Presentation : D* S* Q e P e Price Of ___ Quantity of ________ S1 B A Q 1 P 1w/TAX Price Consumer Pays . . Area of Consumer Surplus LOST Area of Producer Surplus LOST The sum of lost C.S. and P.S. is called Dead Weight Loss (DWL) P 2 (P1-P2) Producer receives Amt. of TAX Use the previous Equilibrium as a reference point. The Price ABOVE Pe to P1 (P1-Pe) is the amount Consumers will pay of the tax and the Price BELOW Pe to P2 is the amount Producers will pay of the tax. Looking at it Geometrically, consumers and producers will share the burden of the tax EQUALLY

PowerPoint Presentation : D* S* Q e P e Price Of ___ Quantity of ________ S1 B A Q 1 P 1w/TAX Price Consumer Pays . . Area of Consumer Surplus LOST Area of Producer Surplus LOST The sum of lost C.S. and P.S. is called Dead Weight Loss (DWL) P 2 (P1-P2) Producer receives Amt. of TAX For this example we can say that the elasticities of Demand AND Supply are The same.

PowerPoint Presentation : Price Of ___ Quantity of __________ $1.00 Qe S* D* S1 Q1 A B C D E F G H Indentify the Areas of Surplus and Tax Incidence 1. CS before tax 2. PS before tax 3. CS after tax 4. PS after tax 5. DWL Consumer 6. DWL Producer 7. Total DWL 8. Amt of Tax 9. Amt of Tax Revenue P 1w/TAX Price Consumer Pays P 2 (P1-P2) Producer receives

PowerPoint Presentation : Price Of ___ Quantity of __________ $1.00 100 S* D* S1 $1.25 80 Indentify the Areas of Surplus and Tax Incidence Tax Revenue in $$ DWL in $$ CS before Tax in $$ PS before Tax in $$ CS after Tax in $$ PS after Tax in $$ Price Producers receive after tax Hint: Must figure the area of the triangle that represents the surplus $.75 $.25 $2.00

PowerPoint Presentation : Price Of ____ Quantity of ______ D* S* P e Q e Assume the Govt levies a PER-UNIT TAX on the Supplier of this good

PowerPoint Presentation : Price Of ____ Quantity of ______ D* S* P e Q e The SUPPLY curve will SHIFT to the LEFT as the cost of production INCREASES By the amount of the TAX. P 1 Q 1

PowerPoint Presentation : Price Of ____ Quantity of ______ D* S* P e Q e From the New Equilibrium Point go directly down to the Supply Curve. This Represents the amount of the tax. P 1 Q 1

PowerPoint Presentation : Price Of ____ Quantity of ______ D* S* P e Q e P1 now becomes P consumer pays. P 1 Q 1 P consumer pays

PowerPoint Presentation : Price Of ____ Quantity of ______ D* S* P e Q e P producer receives becomes what the PRODUCER RECEIVES After paying the tax. Q 1 P consumer pays P producer

PowerPoint Presentation : Price Of ____ Quantity of ______ D* S* P e Q e Use the previous equalibrium point ( Pe ) as a reference point. The amount to the Tax the CONSUMER will bear is the ABOVE the equilibrium Pe (Blue Shade Area) Q 1 P consumer pays P producer Tax burden on Consumers

PowerPoint Presentation : Price Of ____ Quantity of ______ D* S* P e Q e Use the previous equalibrium point ( Pe ) as a reference point. The amount to the Tax the PRODUCER will bear is the BELOW the equilibrium Pe (Red Shade Area) Q 1 P consumer pays P producer Tax burden on Consumers Tax Prduceers

PowerPoint Presentation : Price Of ____ Quantity of ______ D* S* P e Q e NOTE: When DEMAND is relatively MORE INELASTIC Relative to SUPPLY, then the CONSUMER will bear the Burden of the Tax. Q 1 P consumer pays P producer Tax burden on Consumers Tax Prduceers

PowerPoint Presentation : Price Of ____ Quantity of ______ D* S* P e Q e Q 1 P consumer pays P producer Indentify the Areas of Surplus and Tax Incidence 1. CS before tax 2. PS before tax 3. CS after tax 4. PS after tax 5. DWL Consumer 6. DWL Producer 7. Total DWL 8. Amt of Tax 9. Amt of Tax Revenue S1 A B C G E F D I

Who Bears the Burden of a Tax? : Who Bears the Burden of a Tax? If Demand is more elastic relative to supply then the producer will bear the burden on the tax If Demand is more Inelastic relative to supply then the consumer will bear the burden of the tax If Supply is more elastic relative to Demand then the Consumer will bear the burden of the tax If Supply is more Inelastic relative to Demand then the Producer will bear the burden of the tax

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