College Textbook Market:• On average, students spend $1,200

per semester• An 82% rise in price from 2002-

2012• More than an 800% increase

from 1978!!!

So, what do college students do?

Consumer and Producer Surplus

Understand and identify the associated benefits of consumer and producer surplus in the marketplace and be able to explain and illustrate market factors

that increase/decrease consumer/producer benefits.

Willingness to PayLet’s assume we are looking at a perfectly

competitive market for used college textbooks (done to maximize consumer/producer surplus in high priced textbook market)

The maximum price at which you were willing to buy that good or service is a person’s willingness to payThose price points can be translated into a

demand curve for the used textbook

Let’s take a look…

The Demand Curve

In the market for a used Macro textbook, this is what these 5 students are willing to pay for it (their willingness to pay)

Consumer SurplusLet’s assume the book is sold for $30…

Surplus: the left over amount consumers have after making the transactionPrice (willing to pay) − Price (paid) = individual

consumer surplusEx: Aleisha’s CS: $59 − $30 = $29

Can apply to the individual or to the entirety of the marketplace If we do this for every individual in the marketplace we

can calculate the total consumer surplus

The remaining money/opportunity still in possession of the consumer that can be utilized for other opportunities

Consumer SurplusThe total consumer surplus is equal to $49

If the individuals were not willing to buy at $30 they have no consumer surplus

Consumer SurplusThe total consumer surplus generated by purchases

of a good at a given price is equal to the area below the demand curve but above the price (equilibrium price)

Change in Price and Consumer Surplus

Let’s go back to the used textbook market… If the price

decreases to $20, what is the result?• Increase in total

consumer surplus!!!• Aleisha gains, Brad

gains, Claudia gains, and Darren is now included

• Vice versa: increase in price would decrease CS!

Producer SurplusUsed textbook market…lowest prices at which different

students are willing to sell their used textbooks.

Producer SurplusThese price points, willingness to sell, are all different

because people’s opportunity costs are all differentAll associate a different value to their book

Cost: the lowest price at which the seller is willing to sell their good/service

Producer Surplus: gains made by the seller from making a transactionPrice received − seller cost = producer surplus

Let’s assume the market price for the textbook is $30Ex. Andrew: $30 − $5 = $25 Andrew’s Producer Surplus

Producer Surplus Illustrated

Total producer Surplus of $45

Donna and Engelbert are not included because their costs were greater than the market price, so they never made the transaction

Producer SurplusThe total producer surplus from sales of a good at a

given price is the area above the supply curve but below the market price.

Rise in price will increase producer surplusThe producers selling at the initial market price will now

gain surplus and new sellers stand to gain a surplus for the first timeVice versa is also true

Total Surplus

We can combine the CS and PS in order to get the total surplus (TS) in the market…The regular market forces we have learned about will impact CS and PS…