http www bized ac uk Consumer and Producer

http: //www. bized. ac. uk Consumer and Producer Surplus Copyright 2006 – Biz/ed

http: //www. bized. ac. uk Joint Supply • Where an increase/decrease in supply of one good leads to an increase/decrease in supply of another • Beef/hides, Lamb/wool, oil/fuels, milk/dairy products, cocoa/husks, etc. Copyright 2006 – Biz/ed

http: //www. bized. ac. uk Joint Supply S Oil Price S Petrol Price S 1 15 Surplus 6 10 D 1 5 D D 100 150 Quantity bought and sold 80 95 120 Quantity bought and sold Copyright 2006 – Biz/ed

http: //www. bized. ac. uk Composite Demand • Where goods have more than one use – an increase in the demand for one leads to a fall in supply of the other • Milk – used for cheese, yoghurts, cream, butter, etc. • If more milk is used for cheese, ceteris paribus there is less available for butter Copyright 2006 – Biz/ed

http: //www. bized. ac. uk Composite Demand S 1 S Milk Price 20 9 10 6 S Cheese Shortage D 100 130 Quantity bought and sold D 20 50 80 Quantity bought and sold Copyright 2006 – Biz/ed

http: //www. bized. ac. uk Derived Demand • Where the demand for one good is dependent on the demand for another related good • Construction industry – demand for new office construction – demand for office space • Demand for construction workers – demand for construction work • Factor markets – derived demand Copyright 2006 – Biz/ed

http: //www. bized. ac. uk Derived Demand Price (000 s) S Houses S Plasterers Wage Rate (£ per hour) 20 200 12 180 Shortage D 1 D 100 130 Quantity bought and sold D 80 90 120 Quantity hired Copyright 2006 – Biz/ed

http: //www. bized. ac. uk Consumer Surplus • The difference between the price that a consumer is prepared to pay and the actual price paid • Related to the value we place on items • Linked to the degree of utility • Useful concept in analysing welfare gains and losses as a result of resource allocation • Emphasis on the MARKET demand – of those in the market there are some who are willing to pay higher prices than the market price Copyright 2006 – Biz/ed

http: //www. bized. ac. uk Consumer Surplus Price (£) Market Price = £ 5 20 consumers willing to pay £ 5 15 Consumers WILLING to pay £ 9 These 15 consumers get 15 x £ 4 of consumer surplus 9 Total utility = value represented by blue and gold area 5 Blue area is amount paid to acquire good. Gold area = total consumer surplus D = Marginal Utility 15 20 Quantity Demanded Copyright 2006 – Biz/ed

http: //www. bized. ac. uk Producer Surplus • Difference between the market price received by the seller and the price they would have been prepared to supply at • Price received – linked to factor cost + element of normal profit • Producer surplus = abnormal profit Copyright 2006 – Biz/ed

http: //www. bized. ac. uk Price (£) Producer Surplus S Market price = £ 10 At £ 10, suppliers willing to offer 60 for sale 10 Total Revenue = blue area £ 10 x 60 = £ 600 Some suppliers would have offered 35 for sale at £ 6: Producer surplus = 35 x £ 4 = £ 140 6 Gold area = Producer surplus 35 60 Quantity Supplied Copyright 2006 – Biz/ed