Demand curve must reflect the consumers full willingness to pay

Supply curve must reflect all the costs of production

© 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO2 1

Difference between what a consumer is willing to pay for a good and what the consumer actually pays

Extra benefit from paying less than the maximum price

© 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO2 2

(1)Person

(2)Maximum

Price Willing to

Pay

(3)Actual Price

(Equilibrium Price)

(4)Consumer Surplus

Bob $13 $8 $5 (=$13-$8)

Barb 12 8 4 (=$12-$8)

Bill 11 8 3 (=$11-$8)

Bart 10 8 2 (=$10-$8)

Brent 9 8 1 (= $9-$8)

Betty 8 8 0 (= $8-$8)

© 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO2 3

D

Q1

P1

Consumer Surplus

Equilibrium Price

© 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO2 4

Difference between the actual price a producer receives and the minimum price they would accept

Extra benefit from receiving a higher price

© 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO2 5

(1)Person

(2)Minimum Acceptabl

e Price

(3)Actual Price

(Equilibrium Price)

(4)Producer Surplus

Carlos $3 $8 $5 (=$8-$3)

Courtney 4 8 4 (=$8-$4)

Chuck 5 8 3 (=$8-$5)

Cindy 6 8 2 (=$8-$6)

Craig 7 8 1 (=$8-$7)

Chad 8 8 0 (=$8-$8)

© 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO2 6

S

Q1

P1

Equilibrium price

Producer surplus

© 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO2 7

S

Q1

P1

D

Consumer surplus

Producer surplus

© 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO2 8

Quantity (bags)

Pri

ce (

per

bag

)

c

S

Q1Q2

D

bd

a

e

Efficiency lossfrom underproduction

© 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO2 9

c

S

Q1 Q3

D

bf

a

g

Quantity (bags)

Pri

ce (

per

bag

)

Efficiency lossfrom overproduction

© 2013 McGraw-Hill Ryerson Ltd. Chapter 5, LO2 10