Chapter 15 Consumer surplus and producer surplus

I. The concept of consumer surplus (P.2 – 9)

A. Benefit from consumption

1. The benefit from consuming a good reflects

- the ___maximum___ amount of ___other goods___ that a consumer is

___willing to give up____ for the good.

- the ___maximum___ amount of ___money___ that a consumer is

___willing to pay____ for the good.

- the __maximum demand-price___.

2. The benefit from consumption can be measured by

a) the total benefit (TB), i.e., the consumers’ maximum willingness to pay for
___a given quantity of a good______.

b) the marginal benefit (MB), i.e., the consumer’s maximum willingness to

pay for ___an extra unit of a good_____. Economists assume that the marginal
benefit is __decreasing___ as a consumer consumes more of a good.

c) the average benefit (AB), i.e., the consumer’s maximum willingness to pay
for ___a unit of a good on average____.

Exercise 1: The relationship between TB, MB & AB (Book 3, P.5)

1. Fill in the blanks in the following table:

Quantity Total benefit ($) Marginal benefit ($) Average benefit ($)
(units/week)
1 10 __10 – 0 = 10__ __10 ÷ 1 = 10__
2 __10 + 9 = 19__ 9 __19 ÷ 2 = 9.5__
3 __9 × 3 = 27__ __27 – 19 = 8__ 9
4 34 __34 – 27 = 7__ __34 ÷ 4 = 8.5__

KCC(ST) F.5 Economics Ch.15–P.1

 5 __34 + 6 = 40__ 6 __40 ÷ 5 = 6__

2. How can we find

a) TB from AB? TB = ___AB × Q__
b) TB from MB? TB = _____∑ MB_____
c) AB from TB? AB = ___TB ÷ Q__
d) MB from TB? MB = __∆ TB ÷ ∆ Q__
B. MB = P ⇒ maximization of consumer surplus

1. Consumer surplus
- is the concept we use to measure a consumer’s gain from __market
exchange_.
- is the extra amount a consumer ___is willing to pay__ above what he
__actually pays___.
- is the difference between __total benefit___ and __total expenditure___.

2a) If P __<__ MB (say, at 1st plate of sushi), the consumer can gain more
consumer surplus by _increasing consumption. This is because the
__benefit___ from consuming the additional units is more than what
he has to pay for them.

MB of additional plate of sushi ($)

MB
25 Increase in CS when
20 consumption of sushi is
increased from 1 plate to 3
15 plates. P = $15
10
5
0 1 2 3 4 5 Quantity of sushi

b) If P __>__ MB (say, at the 5th plate of sushi), the consumer can gain more
consumer surplus by _decreasing consumption. This is because the saving
in expenditure is more than the loss in ___benefit___ of NOT consuming
those units.

KCC(ST) F.5 Economics Ch.15–P.2

 MB of additional plate of sushi ($)
MB
Increase in CS when
25 consumption of sushi is
20 decreased from 5 plates to 3
plates.
15
P = $15
10
5

0 1 2 3 4 5 Quantity of sushi
c) When a consumer consumes up to the point where his ___marginal benefit___
is equal to the ___market price___, his consumer surplus is maximized.

MB of additional plate of sushi ($)

MB
25 Consumer surplus is
20 maximized when MB
=P
15
10 P = $15
5

0 1 2 3 4 5 Quantity of sushi

3. Derivation of the demand curve from the MB curve:

Given the price of a good, we can find its ___quantity demanded___ from the
marginal benefit (MB) curve by finding the quantity where ___MB = price__.
Therefore, the MB curve is actually the demand curve, which relates __price__
and __quantity demanded___.

$ $
MB curve demand curve = MB curve

P1=MB1

P2=MB2

0 Q1 Q2 Q 0 Q1 Q2 Q

KCC(ST) F.5 Economics Ch.15–P.3

Exercise 2: The concept of consumer surplus (Book 3, P.9)

Complete the following table:

Price Quantity Marginal Total benefit Total Consumer
($) demanded benefit (TB) ($) expenditure surplus ($)
(units /week) (MB) ($) (TE) ($)
5 1 __5__ ____5____ __5 × 1 = 5__ __5 – 5 = 0__
4 2 __4__ _5 + 4 = 9__ __4 × 2 = 8__ _ 9 – 8 = 1__
3 3 __3__ _9 + 3 = 12__ __3 × 3 = 9__ _12 – 9 = 3__
2 4 __2__ _12 + 2 = 14__ __2 × 4 = 8__ _14 – 8 = 6__
1 5 __1__ _14 + 1 = 15__ __1 × 5 = 5__ _15 – 5 = 10__
II. The concept of producer surplus (P.9 – 15)

A. Cost of production

1. The cost of producing a unit of good reflects

- the ___minimum___ amount of ___money___ that a producer

___must receive____ in order to produce that unit of the good.

- the __minimum supply-price___.

2. The cost of production can be measured by

a) the total cost (TC), i.e., the cost of producing ___a given quantity of a
good______.

b) the marginal cost (MC), i.e., the cost of producing ___an extra unit of a
good_____.

In the short run, total cost (TC) = ___total fixed cost (_TFC_) _+ total
variable cost (_TVC_). Since T_F_C remains unchanged when output is
increased, the change in TC is equal to the change in T_V_C, so marginal
cost is equal to marginal __variable___ cost.

c) the average cost (AC), i.e., the cost of producing ___a unit of a good on

KCC(ST) F.5 Economics Ch.15–P.4

average____.

Exercise 3: The relationship between TC, MC & AC (Book 3, P.13)

1. Fill in the blanks in the following table:

Quantity Total cost ($) Marginal cost ($) Average cost ($)
(units/week)
1 3 __3 – 0 = 3__ __3 ÷ 1 = 3__
2 __3 + 5 = 8__ 5 __8 ÷ 2 = 4__
3 __5 × 3 = 15__ __15 – 8 = 7__ 5
4 24 __24 – 15 = 9__ __24 ÷ 4 = 6__
5 __24 +11 = 35__ 11 __35 ÷ 5 = 7__

2. How can we find

a) TC from AC? TC = ___AC × Q__
b) TC from MC? TC = ___∑ MC + TFC_
c) AC from TC? AC = ___TC ÷ Q__
d) MC from TC? MC = __∆ TC ÷ ∆ Q__
B. MC = P ⇒ maximization of producer surplus

1. Producer surplus
- is the concept we use to measure a producer’s gain from __market
exchange_.
- is the extra amount a producer ___actually receives____ above the
__minimum amount he must receive____.
- is the difference between __total revenue___ and __total variable cost__.

2a) If P __>__ MC (say, at 1st plate of sushi), the producer can gain more producer
surplus by _increasing production. This is because the producer can get a price
that is more than enough to cover his cost of producing extra units.

KCC(ST) F.5 Economics Ch.15–P.5

 MC ($)

25 Increase in PS when
MC
production of sushi is
20 increased from 1 plate to
15 3 plates.
P = $15
10
5
0 1 2 3 4 5 Quantity of sushi

b) If P _<__ MC (say, at the 5th plate of sushi), the producer can gain more
producer surplus by _decreasing production. This is because the saving in cost
is more than the loss in revenue of NOT producing those units.

MC ($)

Loss in PS avoided when

25 MC is
production of sushi
20 decreased from 5 plates to 3
plates.
15
P = $15
10
5

0 1 2 3 4 5 Quantity of sushi
c) When a producer produces up to the point where his ___marginal cost__ is
equal to the __market price__, his producer surplus is maximized.

MC ($)

25 MC
Producer surplus is
20 maximized when MC
15 =P
10 P = $15
5
0 1 2 3 4 5 Quantity of sushi

3. Derivation of the supply curve from the MC curve:

KCC(ST) F.5 Economics Ch.15–P.6

 Given the price of a good, we can find its ___quantity supplied___ from the
marginal cost (MC) curve by finding the quantity where ___MC = price__.
Therefore, the MC curve is actually the supply curve, which relates __price__
and __quantity supplied___.

$ $
MC Supply curve = MC curve
curve

P2 = MC2

P1=MC1

0 Q1 Q2 Q
0 Q1 Q2_ Q

Exercise 4: The concept of producer surplus (Book 3, P.15)

Complete the following table:

Price Quantity Marginal Total variable Total revenue Producer
($) supplied cost cost (TVC) ($) (TR) ($) surplus ($)
(units /week) (MC) ($)
1 1 __1__ ____1____ __1 × 1 = 1__ __1 – 1 = 0__
2 2 __2__ __2 ×
_1 + 2 = 3__ 2 = 4__ _ 4 – 3 = 1__
3 3 __3__ __3 ×
_3 + 3 = 6__ 3 = 9__ __9 – 6 = 3__
4 4 __4__ __4 ×
_6 + 4 = 10__ 4= _16 – 10 = 6__
16__
5 5 __5__ _10 + 5 = 15__ __5 × 5= _25 – 15 = 10
25__
III. Total gain from market exchange (P.16 – 18)

A. Total social surplus

- is the concept we use to measure the total gain from __market exchange_
for consumers and producers.
- is the sum of __consumer surplus___ and __producer surplus__.

B. MB = MC ⇒ maximization of total social surplus

KCC(ST) F.5 Economics Ch.15–P.7

1. When __MB > MC_, there is a potential gain (= __marginal social surplus__)
from further market exchange because consumers’ maximum willingness to pay
is more than producers’ minimum supply-price.

2. Total social surplus is maximized when ____MB = MC___.

$
D = MB S = MC

CS
•
Pe PS

0 Qe Q

Exercise 5: The concept of total social surplus

Refer to Book 3, p.18 for Question 1 and p.15 Discuss 15.2 for Question 2.

1. Quantity MB ($) MC ($) Marginal social Total social surplus

(units /week) surplus ($) ($)
1 8 1 __8 – 1 = 7__ __0 + 7 = 7__
2 7 2 _ 7 – 2 = 5__ __7 + 5 = 12__
3 6 3 __6 – 3 = 3__ __12 + 3 = 15__
4 5 5 _5 – 5 = 0__ __15 + 0 = 15__
5 4 8 _4 – 8 = -4__ __15 + (-4) = 11__

2. It is / is not correct to say that bookstores gain at the expense of consumers. As

both consumers and bookstores ___voluntarily___ engage in buying and selling,
they must expect __a gain __ from the transactions. Consumers can gain because
____the prices they pay are lower than the maximum they are willing to
pay_________. Bookstores gain because __the prices they receive are higher
than their costs of supplying the books.______________

KCC(ST) F.5 Economics Ch.15–P.8

IV. Changes in consumer surplus, producer surplus & total social surplus (P.16–18)

1. Effect of a decrease in demand on CS, PS & TSS

c) $

S = MC

P1

P2

D2 = MB2 D1 = MB1

0 Q2 Q1 Q

KCC(ST) F.5 Economics Ch.15–P.9

 original consumer surplus new consumer surplus

original producer surplus new producer surplus

original total social surplus new total social surplus

KCC(ST) F.5 Economics Ch.15–P.10

2. Effect of a decrease in supply on CS, PS & TSS

c) $ S2 = MC2

S1 = MC1

P2

P1

D = MB

0 Q2 Q1 Q

KCC(ST) F.5 Economics Ch.15–P.11

 original consumer surplus new consumer surplus

original producer surplus new producer surplus

original total social surplus new total social surplus

KCC(ST) F.5 Economics Ch.15–P.12

Textbook Chapter end Exercises: (P.23 – 26)

Multiple Choice questions

1. (B), (D) The market price of a good is the same as the price actually paid for
the good / the maximum price one is willing to pay for the good .
(C) _Consumer surplus_____ obtained from consuming one more unit of a
good = the maximum price a consumer is willing to pay for that unit of the good
(i.e., the __benefit___ of that unit of a good to a consumer) – the price the
consumer actually pays for that unit of a good.
So the answer is ___A___.

2. (A) Total benefit = the maximum willingness to pay for a given quantity / an
additional unit of a good.
(B) Average benefit = the maximum willingness to pay for a good on average /
at the margin .
(C) Market price = the price / maximum price a consumer actually pays / is
willing to pay for a good.
So the answer is ___C___.

3. Economics assumes that the marginal benefit of a good decreases / increases /

remains unchanged when more of the good is consumed.
So the answer is ___C___.

4. (B) If the price is lower than the ___marginal cost___, the producer cannot
gain from the exchange.
(C) Both the producer and the consumer can gain from the exchange if the price
is higher than the producer’s _____marginal cost_____ but lower than the
consumer’s __marginal benefit__.
(D) If marginal benefit > price, an increase / a reduction in consumption can
increase consumer surplus and hence total social surplus. So total social surplus
will not be maximized when MB > P.
So the answer is ___A___.

5. Consumer surplus
= total ___benefit___ – total __expenditure___
= total ___benefit___ – (__market price____ × __quantity demanded_)
So the answer is ___D___.

KCC(ST) F.5 Economics Ch.15–P.13

6. Consumer surplus
= the maximum price John is willing to pay for the car – the actual price he pays for the car
= $ (__20 000 – 19 000__ )
So the answer is ___A___.

7. Producer surplus
= total ___revenue___ – total __variable cost___
= (P – MC for the 1st unit) + (P – MC for the 2nd unit) + … (P – MC for the nth unit)
So the answer is ___C___.
8. Producer surplus
= the actual price Paul receives for the flat – the minimum price Paul must receive for the flat
= $ (__3.2 million _– _3 million_ )
So the answer is ___B___.

9. Consumer surplus = Area ___A___

Producer surplus = Area ___B___
Total social surplus = Consumer surplus + Producer surplus = Area _A_+ B__
Total expenditure = Total revenue = Area ___B_+ C__
So the answer is ___C___.

Short Questions

1. Agree / Disagree .

Whenever __the marginal benefit is higher than the price__(_MB > P__),
Sue, being a rational consumer, will buy more of a good to increase her
consumer surplus.
Whenever ____MB <__P____, Sue, being a rational consumer, will buy less of
the good.

Therefore, given Sue’s MB curve is decreasing / downward-sloping , Sue will

consume up to the point where __the marginal benefit for the last unit of the
good is equal to the price she actually pays for that unit of the good.

KCC(ST) F.5 Economics Ch.15–P.14

2. Given the price of a good, we can find its ___quantity demanded___ from the
marginal benefit (MB) curve by finding the quantity where ___MB = price__.
Therefore, the MB curve is actually the demand curve, which relates __price__
and __quantity demanded___.

$ $
MB curve demand curve = MB curve

P1 = MB1

P2=MB2

0 Q1 Q2_ Q 0 Q1 Q2_ Q

3. Given the price of a good, we can find its ___quantity supplied___ from the
marginal cost (MC) curve by finding the quantity where ___MC = price__.
Therefore, the MC curve is actually the supply curve, which relates __price__
and __quantity supplied___.
$ $
MC Supply curve = MC curve
curve

P2=MC2

P1=MC1

0 Q1 Q2_ Q
0 Q1 _Q2 Q

4a) Consumer surplus

= the maximum price Peter is willing to pay for the book – the actual price he pays for it
= $ (_100 – 100 × __90%__ )
= $__10__

KCC(ST) F.5 Economics Ch.15–P.15

b) Producer surplus
= the actual price the seller receives for the book – the minimum price the seller must receive
to cover his variable cost
= $ (_100 × __90%_ –_ 100 × __70% )
= $__20__

5a) Equilibrium price = $__6__ & equilibrium quantity = __3__ units

b) Quantity Marginal Marginal Marginal Total social Consumer Producer

(units/week) benefit cost social surplus surplus surplus surplus
(MB) (MC) (MSS) ∑MSS ∑MB–TE TR - ∑MC
1 $10 $2 $(10 – 2) $8 $(10 – 6) $(6 – 2)
= $_8_ = $_4_ = $_4_
2 $8 $4 $(8 – 4) $(8 + 4) $(18 – 12) $(12 – 6)
= $_4_ = $_12_ = $_6_ = $_6_
3 $6 $6 $(6 – 6) $(12 + 0) $(24 – 18) $(18 – 12)
= $_0_ = $_12_ = $_6_ = $_6_
4 $4 $8 $(4 – 8) $(12 – 4) $(28 – 24) $(24 – 20)
= _-$4_ = $_8_ = $_4_ = $_4_
5 $2 $10 $(2 – 10) $(8 – 8) $(30 – 30) $(30 – 30)
= _-$8_ = $_0_ = $_0_ = $_0_

Structured Questions

1a) P S

0 no. of visitors

KCC(ST) F.5 Economics Ch.15–P.16

b) HK has excess capacity during off- P S
peak seasons because the price is D
_above the equilibrium level when P1
the ___demand__ is much lower
during the off-peak seasons.

0 Qd Qs No. of
excess supply visitors

c) Suppose the original price of each

visit is P1. After paying a lump $
sum for an annual pass, the price
of each additional visit to the
visitor ____falls to $0_____ D
because ____s/he need not pay
for additional visits________. P1
So the visitor will visit HK
Disneyland until _____his/her
marginal benefit is equal to $0_. •
Hence, the number of visit will P2=0 Q1 Q2 No. of
__increase from Q1 to Q2__. visits

d) The total benefit and consumer surplus will be larger under the annual pass /
pay-per-visit scheme.

Total benefit Total benefit

$= consumer surplus + total expenditure $ = consumer surplus + total expenditure
= CS + TE = CS + TE

D= MB D=
= CSMB
CS CS
P1 P1
TE TE CS
•
0 Q1 No. of P2=0 Q1 Q2 No. of
visi visits
ts

KCC(ST) F.5 Economics Ch.15–P.17

e) The ___higher-demand visitors are more likely to buy the annual pass because
_the total benefit from many visits is more likely larger than the lump sum
fee for the annual pass. A lower-demand visitor may visit HK Disneyland
once or twice a year, so the total benefit is more likely lower than the lump
sum fee for the annual pass. _______________________________________

2a) Producer surplus is ____the extra amount that a producer actually receives
above the minimum amount he must receive to produce a given quantity of
a good.______________

It is the difference between ___total revenue and total variable cost of

production_________________.

_Saudi Arabia_ would enjoy a higher producer surplus because ___the

extraction cost of oil is much lower in Saudi Arabia._______________

b) Some countries import oil from other countries rather than extract oil from their
oil wells because ____the price paid for imported oil is lower than the
extraction cost of oil from their domestic oil wells._________________

c) $

S = MC

P2

P1

D1 = MB1 D2 = MB2

0 Q1 Q2 Q

KCC(ST) F.5 Economics Ch.15–P.18

 original consumer surplus original producer surplus

new consumer surplus new producer surplus

As both the consumer surplus and producer surplus ___increase___, the total
social surplus would ___increase___.

KCC(ST) F.5 Economics Ch.15–P.19