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CONSUMER AND PRODUCERS SURPLUS
The consumers surplus
This is the difference between the price a consumer is willing to pay and the
actual price he pays for the commodity.
e.g. if a consumer goes to the market to buy 1 kg of meat at Shs 2000 but he
finds the same kg at Shs 1500 he then enjoys the surplus of Shs 500Alternatively consumers surplus to extra utility enjoyed by a consumer without
paying for it.
Graphically consumers surplus is represented by the area above the market
price and below the demand curve.
Mathematically consumers surplus is represented by the difference between
total utility and marginal utility i.e. TUMU = consumers surplus.
Question
Study the table below and answer the questions that follow:-
Price (Shs) Quantity demanded
300 1
250 2
200 3
150 4
100 5
50 6
Using Shs 150 as the fixed market price
i) calculate the consumers surplus
ii) Illustrate the level of consumers surplus on the
graph
The producers surplus
This refers to the difference between the price a producer is willing to charge
and what he actually charges.
Price Quantity supplied
300 1
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350 2
400 3
450 5
500 6
550 7
650 8
MU TU
MU = 550 x 6 = 3,300Shs
TU = 300 + 350 + 400 + 450 + 500 + 550 + = 2250
Producers surplus = 3300 2200 = 750Shs
Graphically producers surplus is represented by the above the supply curve and
below the market price. Graphically it is shown as below: - supplyMARKET EQUILIBRIUM
When supply and demand are equal (i.e. when the supply curve and demand
curve intersect) the economy is said to be at equilibrium.
At this point, the allocation of goods is at its most efficient because the amount
of goods being supplied is exactly the same as the amount of goods being
demanded.
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DETERMINATION OF EQUILIBRIUM PRICE AND QUANTITY USING THE
DEMAND AND SUPPLY FUNCTIONS
Given the following functions:
Qd = 36 4PQs = -12 + 12P,
Calculate the equilibrium price and quantity.
SOLUTION
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DEVIATIONS FROM EQUILIBRIUM
Maximum Price Legislation: This is where the government sets the maximum
price of a commodity such that it becomes illegal for one to buy or sell above
that price. It is usually imposed in periods of scarcity of commodities.
Effects of Maximum Price Legislation
If the government sets the maximum price at OP2;
(i). There would be excess demand.
(ii). Artificial shortage of the commodity where sellers board
commodities to create shortage and sell at very high prices
(iii). Black-market would prevail i.e. a market in which commodities are
sold illegally are prices that violate the restriction. Sellers would break the law
and sell at very low prices behind the counters.
(iv). Bribery, corruption and selling of scarce commodities to only
friends
MINIMUM PRICE LEGISLATION (PRICE FLOOR)
This is where the government fixes minimum prices of commodities such that it
becomes for one to sell or buy below that price.
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