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"Look at the image below. Can you identify the amount of $-benefit enjoyed by both consumer and producer, thanks to the use of a price mechanism?"
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"That's right! Thanks to the forces of demand and supply, the free-market-determined price resulted in both parties receiving a benefit or a monetary 'surplus of benefit' equal to the difference between what they were willing to pay/receive and what they actually paid/received (£10 gain for the buyer and £9 for the seller)."
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--2.5.1 CONSUMER SURPLUS--
--2.5.1 CONSUMER SURPLUS--
"Let's look at the buyer-side first: the difference between what the consumer above was willing to pay for the 1st unit of the good (£20) and the price he actually paid for it (£10) is referred to as 'CONSUMER SURPLUS', and if we looked at a demand curve, it would be represented by the area below the demand curve and above the actual price."
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--TASK--
"Look at the individual demand diagram below and explain why @ a price of $2, consumer surplus totals $12. Also comment on the relationship between price and consumer surplus."
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"Let's also look at a market demand curve example."
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--2.5.2 PRODUCER SURPLUS--
--2.5.2 PRODUCER SURPLUS--
"Now let's look at the seller-side: the difference between what the producer is willing to receive (his 'supply curve') and the price they actually received is referred to as PRODUCER SURPLUS, and if we looked at a supply curve, it would be the area above the supply curve and below the actual price."
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--TASK--
"Look at the individual firm's diagram below and explain (using a diagram) why at a price of $2 producer surplus totals $12. Also comment on the relationship between price and producer surplus."
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"Let's also look at a market demand curve example."
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--TOTAL SOCIAL SURPLUS--
--TOTAL SOCIAL SURPLUS--
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"If CS expresses the total benefits enjoyed by the highest valued consumers, and PS the total benefits enjoyed by the lower-cost producers, then..."
'CS' + 'PS' = 'TOTAL SOCIAL SURPLUS'
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--TASK--
"Look at the diagram below. What do you notice about the TTS and the equilibrium quantity of output?"
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"That's right, the 'TSS IS MAXIMISED @ EQUILIBRIUM', and any output level below Qe will result in LOST BENEFIT, which is referred to as a 'DEADWEIGHT LOSS'."
--2.5.3/4 CAUSES OF CHANGES--
--2.5.3/4 CAUSES OF CHANGES--
--FIXED PRICES--
"Sometimes the government may 'intervene' in a market and fix the price above (price ceiling) or below (price floor) the equilibrium."
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--TASK--
"Sketch a price ceiling and a price floor diagram, then use the slider below to determine the impact they have on the amount of CS, PS, and TSS. Then summarise your findings."
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"For a price ceiling, we know that this raises the price received by producers, increasing PS on the units that are still sold; however, the higher prices cause quantity demanded, and therefore the quantity actually sold, to fall, meaning producers lose the PS they previously earned on these units that are no longer sold.”
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“If the gain in PS from the higher price is greater than the loss in PS from fewer sales, PS rises, but if the loss from fewer sales is greater than the gain from the higher price, PS falls.”
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"Select the 'show gains and losses' box, and set the price to $20 to see the loss in CS relative to the gain."
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--TASK--
"Now rewrite this for a price floor."
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--DEMAND SHIFTS--
"If DEMAND for the good rises or falls (let's stick to parallel shifts only), this, of course, will impact the price and equilibrium quantity, which will in turn impact CS, PS and TSS."
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--TASK--
"Sketch a diagram showing an increase and a decrease in demand, then use the slider below to help you determine the impact of a 'parallel' increase or decrease in demand on CS, PS, and TSS. Then summarise your findings."
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"That's right; an increase in demand increases both CS and PS, whilst a decrease in demand decreases both CS and PS."
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--SUPPLY SHIFTS--
"If SUPPLY for the good rises or falls (let's stick to parallel shifts only), this, of course, will impact the price and equilibrium quantity, which will in turn impact CS, PS and TSS."
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--TASK--
"Sketch a diagram showing an increase and a decrease in supply, then use the slider below to help you determine the impact of a 'parallel' increase or decrease in supply on CS, PS, and TSS. Then summarise your findings."
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"That's right; an increase in supply increases both CS and PS, whilst a decrease in supply decreases both CS and PS."
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--2.5.4 LINK TO PED & PES--
--2.5.4 LINK TO PED & PES--
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"The relative elasticities of demand and supply can significantly affect the magnitude of changes in consumer surplus (CS) and producer surplus (PS). For parallel shifts in demand and supply, they do not change the direction of these changes. However, with binding maximum and minimum prices, elasticity can also determine whether the intended beneficiaries gain or lose surplus."
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--TASK 1.--
"Move the 'New price' slider below and find the first 2 scenarios mentioned in the table above and explain the opposing forces that lead to ambiguity."
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--IMPACT ON FIXED PRICES--
--TASK 1.--
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--IMPACT ON SHIFTS--
--TASK Pt. 1--
"Click on 'Demand increases', then slide 'Demand responsiveness' to the right. What do you notice about the impact on CS and PS? "
When demand increases, both consumer surplus and producer surplus increase. However, the relative elasticities of demand and supply affect how the additional surplus is distributed between consumers and producers.
"That's right the greater the PED value (The more elastic), the greater the increase in CS and PS, and vice versa
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