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Consumer Surplus Example

Example of Consumer Surplus

  1. Consumer Surplus- the quantity of goods that the customers are willing to acquire from the market Producer Surplus- the quantity of products that the producers are willing to avail or supply in the market
  1. Q= represents the point of equilibrium

Qd= a-3(P)

  1. The profit is an indication that the marginal revenue (MR) is more than the marginal cost (MC) while a loss indicates that the marginal cost (MC) is more than the marginal revenue (MR)
  2. Gasoline is in surplus when the quantity supplied is above what the consumers demand that is, the supply is above the point of equilibrium. Shortages are experienced when demand is below the point of equilibrium. That is the quantity demanded is more than what the producers are able to supply.
Table 1
Perky Dry Cleaners
Quantity LaborTotal ProductFixed  CostVariable CostTotal Cost
0000100
1101010100
2181020180
3241030240
4281040280

 

Total Product (Q)Total Fixed Cost($)Total Variable Cost($)Total Cost($)Average Fixed Cost($)Average Variable Cost($)Average Total Cost($)Marginal Cost($)
060060
16045105604510545
260851453042.572.540
36012018070406035
4601502101537.552.530
56018524512374935
6602252851037.547.540
7602703308.5738.647.1045
8603253857.540.648.2555
9603904506.6743.35065
10604655256.746.550.275
  1. At Q=10 ATC=15

TC=15*10= $150

AVC= 8

TVC=$80

But TC=TFC+TVC

150=TFC+80

TFC= (150-80) = $70

At Q=20; TC= VC+FC

= (8*20) +70

160+70=230

ATC=230/20= 11.5

AVC=8

The vertical distance will be 3.5. The distance represents the AFC of the production.

A long run- average cost curve is made of many short run average cost curves as a firm in the long run will be able to change as inputs.

The LRACC is called envelope of cost curves as it is derived from SAC curves which are known as plant curves. In the short run the firm can operate in any short run cost curve given plant size.

  1. It will therefore increase or decrease output by changing the amount of variable inputs. But in the long run the firm chooses which SAC curves it should operate to produce a given level of output so that total cost is minimum. In the diagram above, in the long, run to produce 25 units of output, the firm may decide to operate at small plant size with a cost of $40 or medium size with a cost of $50. To produce 40 units, the firm can either operate at small plant size with a cost of $40 or medium plant size with a lower cost. Therefore to derive the LRAC curve, the firm will consider only the level of outputs with the lowest SAC that is the point of tangencies of the short run average cost cur.
  2. Graph1: Salt

Graph 2: Petroleum products

Graph 3: Alcohol

Graph 4: Land

Graph5: Bread

  1. Salt- Total Revenue will increase as salt has a perfectly inelastic demand. Its price remains constant irrespective of increase in price.

Gasoline and Tobacco

Total revenue of the two products will reduce since they have a relative inelastic demand. The demand of the products slightly responds to price changes due to various factors such as taxation.

Housing

Total revenue will remain constant as the proportional change in price equals proportional change in demand.

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