Micro Economics
Unit 6 Hints
Sample Economy-Wide TOTAL Surplus Calculation in a PERFECTLY Competitive Market, with NO Government Price Controls.
Economy-Wide Total Surplus (TS) = Consumer Surplus (CS) + Producer Surplus (PS) – any additional expense to the economy.
Consumer Surplus (CS) in a Perfectly Competitive Market
Formula for area of a triangle:
(height * base )/ 2
Height = high price minus low price
= $40 - $20
= $20
Base = large quantity minus smaller quantity
= 4,000 - 0
= 4,000
CS = (height * base) / 2
= ($20 * 4,000) / 2
= ($80,000) / 2
Consumer Surplus (CS) = $40,000
PLUS
Producer Surplus (PS) in a Perfectly Competitive Market
Formula for area of a triangle: (height * base )/ 2
Height = high price minus low price
= $20 - $0
= $20
Base = large quantity minus smaller quantity
= 4,000 - 0
= 4,000
PS = (height * base) / 2
= ($20 * 4,000) / 2
= ($80,000) / 2
Producer Surplus (PS) = $40,000
MINUS
Any additional expense to the economy (such as extra taxes that must be paid by the citizens)
In a perfectly competitive market with no government price controls, there are NO additional expenses.
Economy-wide TOTAL surplus, in a perfectly competitive market with NO government price controls
Economy-wide Total Surplus (TS) = Consumer Surplus (CS) + Producer Surplus (PS) – any additional expense to the economy.
= $40,000 + $40,000 - $0
Economy-wide Total Surplus (TS) = $80,000
===============
Sample Economy-Wide TOTAL Surplus calculation in a PERFECTLY Competitive Market, with a government set legal price floor and in which the government buys the unsold excess at the price floor price, and must collect extra taxes to facilitate that purchase.
Economy-wide Total Surplus (TS) = Consumer Surplus (CS) + Producer Surplus (PS) – any additional expense to the economy.
Consumer Surplus (CS) with a government set legal price floor and in which the government buys the unsold excess at the price floor price, and must collect extra taxes to facilitate that purchase.
Formula for area of a triangle: (height * base )/ 2
Height = high price minus low price
= $40 - $30
= $10
Base = large quantity minus smaller quantity
= 2,000 - 0
= 2,000
CS = (height * base) / 2
= ($10 * 2,000) / 2
= ($20,000) / 2
Consumer Surplus (CS) = $10,000
PLUS
Producer Surplus (PS) with a government set legal price floor and in which the government buys the unsold excess at the price floor price, and must collect extra taxes to facilitate that purchase.
Formula for area of a triangle: (height * base )/ 2
Height = high price minus low price
= $30 - $0
= $30
Base = large quantity minus smaller quantity
= 6,000 - 0
= 6,000
PS = (height * base) / 2
= ($30 * 6,000) / 2
= ($180,000) / 2
Producer Surplus (PS) = $90,000
MINUS
Any additional expense to the economy (such as extra taxes that must be paid by the citizens)
How much extra taxes does the government need to collect in order to buy the amount left unsold?
# Unsold = # supplied minus # sold to consumers
= 6,000 - 2,000
= 4,000
Extra taxes required to buy the unsold amount = price * # unsold
= $30 * 4,000
= $120,000
Economy-wide TOTAL Surplus in a PERFECTLY Competitive Market, with a government set legal price floor and in which the government must collect extra taxes to buy the unsold excess at the price floor price.
Economy-wide Total Surplus (TS) = Consumer Surplus (CS) + Producer Surplus (PS) – any additional expense to the economy.
= $10,000 + $90,000 - $120,000
Economy-wide Total Surplus (TS) = -$20,000