Consider a market in which Bert from problem 4 is the buyer...

Consider a market in which Bert from problem 4 is the buyer and Ernie from problem 5 is the seller. a. Use Ernie's supply schedule and Bert's demand schedule to find the quantity supplied and quantity demanded at prices of $\$ 2, \$ 4,$ and $\$ 6 .$ Which of these prices brings supply and demand into equilibrium? b. What are consumer surplus, producer surplus, and total surplus in this equilibrium? c. If Ernie produced and Bert consumed one fewer bottle of water, what would happen to total surplus? d. If Ernie produced and Bert consumed one additional bottle of water, what would happen to total surplus?

Consider a market in which Bert from problem 4 is the buyer and Ernie from problem 5 is the seller.
a. Use Ernie's supply schedule and Bert's demand schedule to find the quantity supplied and quantity demanded at prices of $\$ 2, \$ 4,$ and $\$ 6 .$ Which of these prices brings supply and demand into equilibrium?
b. What are consumer surplus, producer surplus, and total surplus in this equilibrium?
c. If Ernie produced and Bert consumed one fewer bottle of water, what would happen to total surplus?
d. If Ernie produced and Bert consumed one additional bottle of water, what would happen to total surplus?

Key Concepts

Marginal Analysis of Surplus Changes

Marginal analysis involves examining the effects on total surplus from an incremental change—in this case, the impact of consuming or producing one more or one fewer unit of a good. This analysis helps in understanding the precise adjustments in consumer and producer benefits that result from changes in the quantity traded.

Producer Surplus

Producer surplus is the benefit producers receive when they sell a good at a market price that is higher than the minimum price at which they would have been willing to sell. It highlights the additional earnings producers gain from selling their products above their production costs or reservation prices.

Total Surplus

Total surplus is the sum of consumer and producer surplus, representing the combined net benefits to society from the market exchange. It is a measure of overall economic efficiency, indicating how well the market is allocating resources to maximize societal welfare.

Market Equilibrium

Market equilibrium occurs when the quantity supplied equals the quantity demanded at a particular price, meaning there is neither excess supply nor shortage. At this point, the price and quantity in the market become stable, as both producers and consumers are satisfied with the amount traded.

Supply and Demand Schedules

A supply schedule lists the quantities of a good that producers are willing to sell at various prices, while a demand schedule lists the quantities that consumers are willing to purchase at those prices. These schedules are foundational tools in understanding market behavior and are used to determine interactions between buyers' and sellers' decisions across different prices.

Consumer Surplus

Consumer surplus is the economic benefit that consumers receive when they are able to purchase a good at a price lower than the highest price they are willing to pay. It represents the difference between the maximum price a consumer is prepared to pay and the actual market price, illustrating the benefit accrued to the consumer from the transaction.

Transcript

00:03 First, let's review the concepts of consumer surplus, producer surplus, and total surplus.

00:11 Consumer surplus equals buyers ' willingness to pay for a good minus the amount they actually pay, and it measures the benefit buyers get from participating in a market.

00:24 Consumer surplus can be computed by finding the area below the demand curve and above the price.

00:32 Producer surplus equals the amount sellers receive for their goods minus the cost of production, and it measures the benefit sellers get from participating in a market.

00:46 Producer surplus can be computed by finding the area below the price and above the supply curve.

00:53 The sum of consumer surplus and producer surplus is total surplus.

01:02 Here i have the graph of the demand and supply schedules.

01:06 And for the first part, we will find the quantity supplied and quantity demanded for three levels of prices.

01:22 At a price of $2 per bottle, the quantity supply is 1 and the quantity demanded is 3.

01:35 At a price of 4, the supply quantity and demanded quantity is 3.

01:41 Are both two.

01:48 For the price of six, the supply and demanded quantity is they are three and one respectively.

02:01 So you can tell that only a price of four dollar brings supply and demand into equilibrium with an equilibrium quantity of two.

02:22 I have q stars equals two and p stars equals four.

02:33 Given the equilibrium, now we can calculate consumer surplus and producer surplus.

02:40 We have this area as consumer surplus.

02:56 And this area is producer surplus.

03:04 Each area consists of two rectanglers and the sum of the two rectangular areas is the value of the surplus.

03:18 For consumer surplus.

03:25 We get three as a surplus for the first bottle and one for the surplus of the second bottle.

03:40 So consumer surplus would be four dollar.

03:46 Producers surplus is also three for the first bottle and one for the second bottle.

04:01 So producer surplus is also $4...

Please give Ace some feedback