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Consumer Surplus & Producer Surplus
• Identify these areas at equilibrium.
• Show what happens after a change (shift in demand/supply, tax, price ceiling, or price floor).

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Production Possibilities Frontier (PPF)
• Draw graphs with two specific goods.
• Identify points of efficiency, impossible points, and situations when the PPF shifts.

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• Types of costs: Fixed Cost (FC), Variable Cost (VC), Total Cost (TC), Marginal Cost (MC).

• Draw and interpret cost curves (AFC, AVC, ATC, MC).

• Practice identifying costs in short case readings. For example:

" Ms. Trang owns a small café in a busy neighborhood. Every month, she pays $2,000 rent and $1,000 in salaries (fixed costs). To make each cup of coffee, she needs beans, milk, sugar, and a cup, costing $1.50, plus $0.50 in electricity and water (variable costs). At 2,000 cups sold, calculate her fixed, variable, and marginal costs."

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Demand and Supply Analysis
• Analyze a scenario where the market experiences a shock (change in demand or supply, usually one at a time).
• Draw the new equilibrium and compare price and quantity before and after the change.

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The demand curve shows the relationship between price and quantity demanded, assuming other factors remain constant.

However, in reality, there are many non-price determinants that affect demand.

When these factors change → the demand curve shifts to the left or to the right.

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Cost Structures
• Types of costs: Fixed Cost (FC), Variable Cost (VC), Total Cost (TC), Marginal Cost (MC).
• Draw and interpret cost curves (AFC, AVC, ATC, MC).
• Practice identifying costs in short case readings. For example:
" Ms. Trang owns a small café in a busy neighborhood. Every month, she pays $2,000 rent and $1,000 in salaries (fixed costs). To make each cup of coffee, she needs beans, milk, sugar, and a cup, costing $1.50, plus $0.50 in electricity and water (variable costs). At 2,000 cups sold, calculate her fixed, variable, and marginal costs."

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Price Controls
• Draw graphs with price ceilings and price floors when they are binding.
• Understand the meaning and provide examples of each.

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Binding price floor (above equilibrium) — minimum price causes surplus (unsold).

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Taxes and Market Outcomes
• Draw a demand and supply graph at equilibrium.
• After a tax (on buyers or sellers), determine:
– New price paid by buyers.
– New price received by sellers.
– Tax per unit, tax revenue, deadweight loss.

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Elasticity
• Calculate price elasticity of demand.
• Draw graphs of demand and supply curves when they are elastic or inelastic.

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Meaning: A small change in price leads to a large change in quantity demanded (∣Ed​∣>1).

Revenue: A price cut increases total revenue.

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Demand:

Income (normal vs interior)

Normal good: income increases --> D increase (shift right)

Interior: income increases --> D decrease (shift left)

Prices of related goods (substitutes vs complements)

Substitutes: increase Price of 1 --> D for other increase (shift right)

Tastes

Expectations

Number of buyers: increase --> D increase (shift right)

Supply:

Input Prices: increase --> S decrease (shift left)

Technology: advance --> S increase (shift right)

Expectations about the future

Number of sellers: increase --> S increase (shift right)

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Definition: A legal minimum price buyers must pay.
🔹 Binding condition: A price floor is binding only if it is set above the equilibrium price.

At this higher price, supply > demand → surplus.

Graph:

Again, draw supply & demand curves.

Show equilibrium.

Draw a horizontal line above equilibrium → label it "Price Floor".

Shade the gap between Qs and Qd → surplus.

Example:

Minimum wage: Government sets a wage higher than market equilibrium.

Result: More workers want jobs, but firms hire fewer → unemployment (surplus of labor).

Agricultural price supports: Government guarantees farmers a minimum price for crops → leads to surpluses.

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Consumer's surplus: Difference between the maximum price a buyer is willing to pay and the actual price they have to pay.

Producer's surplus: Difference between the producer's minimum accepted price and the price they would receive.

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Meaning: A large change in price leads to only a small change in quantity demanded (∣Ed​∣<1).

Revenue: A price increase increases total revenue.

Examples: Necessities like gasoline or essential medicine.

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- CS: the benefits that buyer will receive when the buy goods.

- CS = WTP - P

- Measuring consumer surplus with the demand curve: a low price raises consumer surplus.

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Consumer & Producer Surplus — Mr Banks Home Education _ Online Revision____

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PRODUCER SURPLUS: Difference between the price a producer is willing to accept and what is actually paid (area between demand curve and market equilibrium).

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Meaning: A small change in Price leads to a large change in Quantity Supplied (Es​>1).

Timing: Supply tends to be more elastic in the long run.

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A price ceiling also creates a deadweight loss of area A and B. The consumer surplus area changes from areas E and B to E and C and the producer surplus area is reduced from A, C, and D to only D.

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Price floor = government-set minimum price; cannot fall below this level.

Purpose: protect sellers or workers, ensure basic income.

Outcome: price above equilibrium → surplus (excess supply).

Price supports = government intervention to maintain prices above equilibrium, often by purchasing surplus.

Impacts:

Producers benefit (higher price, stable income).

Consumers & taxpayers bear costs (higher prices, subsidy burden).

Political economy: sustained by social concerns (supporting farmers, rural life) and lobbying power

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no Price floor: CS=E+C+B; PS=D+A

binding Price floor: CS=E; PS=C+D; --> DWL=A+B

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Another government market intervention is the imposition of a tax or subsidy. An excise tax is a tax levied on the production or consumption of a product. To consumers, the tax increases the price of the good purchased moving them along the demand curve to a lower quantity demanded. The vertical distance between the original and new supply curve is the amount of the tax. Due to the tax, the new equilibrium price (P1) is higher and the equilibrium quantity (Q1) is lower. While the consumer is now paying price (P1) the producer only receives price (P2) after paying the tax.

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PED > 1 → Elastic (quantity demanded is sensitive to price changes)

PED < 1 → Inelastic (quantity demanded is not very sensitive to price changes)

PED = 1 → Unitary elastic (quantity demanded changes proportionally to price changes)

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No tax: CS=green; PS=yellow, no DWL

Tax: CS=A, PS=B, TR=orange ==> TS=CS+PS+TR; DWL

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Price ceiling = government-set maximum price; cannot rise above this level.

Purpose: protect consumers, keep essential goods/services affordable.

Outcome: price below equilibrium → shortage (excess demand).

Examples: rent control, basic necessities.

Impacts:

Consumers benefit if they obtain goods at lower price.

Producers lose revenue, reduce supply.

Market faces shortages, rationing, possible black markets.

Political economy: driven by consumer demand and voter pressure, especially in housing and essential goods.

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Marginal cost = deltaTC/deltaQ

AFC= FC/Q

AVC= VC/Q

ATC= TC/Q

ATC= AVC + AFC

AFC - always declines as output rises

AVC - typically rises as output increases

MC < ATC => ATC falling

MC > ATC => ATC rising

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Meaning: A large change in Price leads to only a small change in Quantity Supplied (Es​<1).

Examples: In the short run, specialized goods, or agricultural products after the harvest.

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Price Ceiling

A maximum price set by the government.

Result: Shortage – too many buyers, not enough sellers.

📈 Price Floor

A minimum price set by the government.

Result: Surplus – too many sellers, not enough buyers.

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1. Fixed Cost (FC)

Definition: Costs that do not change with the level of output.

Examples: rent, permanent staff salaries, insurance.

Recognition: Even if production = 0, you still pay this cost.

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Producer Surplus

The converse situation can apply when consumers are willing to pay a higher price than producers would accept.

PRODUCER SURPLUS: Difference between the price a producer is willing to accept and what is actually paid (area between demand curve and market equilibrium).

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2. Variable Cost (VC)

Definition: Costs that change depending on output.

Examples: raw materials, packaging, electricity, water.

Recognition: The more you produce, the higher this cost.

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Supply increase (shift right) — price falls and quantity rises (P ↓, Q ↑)

Demand increase (shift right) — price rises and quantity rises (P ↑, Q ↑)

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Binding price ceiling (below equilibrium) — price is capped, shortage occurs.

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3. Total Cost (TC)

Formula: TC = FC + VC

Definition: The total cost of producing a certain quantity of goods or services.

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New price paid by buyers = Pb.

New price received by sellers = Ps.

Tax per unit = Pb – Ps.

Tax revenue = (Tax per unit) × (Q with tax).

Deadweight loss = lost TS from trades that no longer happen (triangle between old Q* and new Q).

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4. Marginal Cost (MC)

Definition: The extra cost of producing one additional unit.

Formula: MC = ΔTC / ΔQ

Recognition: Ask yourself, “How much more will it cost to produce one more unit?”

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Case Example: Ms. Trang’s Café

Fixed Cost (FC) = $2,000 rent + $1,000 salaries = $3,000

Variable Cost (VC) = $2 per cup × 2,000 cups = $4,000

Total Cost (TC) = FC + VC = $3,000 + $4,000 = $7,000

Marginal Cost (MC) = $2 (the cost of making one more cup)

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Tax burden on sellers = Pe-Ps

Tax burden on buyers = Pb-Pe

Pb > Pe; Ps < Pe

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– If demand increases substantially while supply falls just a little: equilibrium quantity –rises
– If supply falls substantially while demand rises just a little: equilibrium quantity falls

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Company A is a clothes factory. This year, the input price decreases --> the Supply curve shifts to the right (A produces more clothes) --> The quantity, therefore, increases from Q-Q1, and price falls from P-P1

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• Draw graphs with two specific goods.
• Identify points of efficiency, impossible points, and situations when the PPF shifts (technology, resources)

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Price Ceiling

Definition: A legal maximum price sellers are allowed to charge.

🔹 Binding condition: below the equilibrium price.

At this lower price, demand > supply → shortage.

Graph:

Draw supply & demand curves.

Show equilibrium.

Draw a horizontal line below equilibrium → label it “Price Ceiling”.

Shade the gap between Qd and Qs → shortage.

Examples:

Rent control: Government sets maximum rent lower than market rent.
→ More people want apartments, but landlords supply fewer → housing shortage.

Gasoline price controls (1970s US): Ceiling on gas prices led to long lines and shortages at gas stations.