Consumption- Dead and supply Producer Surplus Producer surplus, PS, is a measure of how much money a producer would need to be given, in order to be just Hilling to give up their entire supply of a particular good. Producer surplus is the area behind the supply curve. The change in producer surplus following a price change is illustrated in the second graph. 1 The supply curve shows how much each consecutive unit of the good costs the producer. The producer actually gets p*for each unit. Producer surplus is the difference between what it costs to make each unit and the actual price. Denand and Supply Market demand To obtain market demand for good 1 from individual demands, simply add them all X1(p1,P2 )=∑式(P2,P,m) The demand curve is written D(P) and will look something like this: D(P) X The inverse demand function P(X)is often used, and is simply calculated by finding price in terms of quantities from D(P). It measures the marginal rate of substitution of every consumer purchasing the good. ote aggregate demand is a function of all other prices and incomes. It will shift given a change in these variables example. if the good is normal and there is an increase in income levels it will shift to the right Adding each individuals urplus gives the market behind the demand curveConsumption — Demand and Supply 3 Producer Surplus • Producer surplus, PS, is a measure of how much money a producer would need to be given, in order to be just willing to give up their entire supply of a particular good. • Producer surplus is the area behind the supply curve. The change in producer surplus following a price change is illustrated in the second graph. ................................................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................................................. ............................................................................................................. ................................................................................................................................................................... ....................................................... 0 0 p x p x p ∗ x ∗ p ∗ 1 x ∗ 1 x ∗ 2 p ∗ 2 PS ∆PS . . . . . . . . . . . . . . . • The supply curve shows how much each consecutive unit of the good costs the producer. The producer actually gets p ∗ for each unit. Producer surplus is the difference between what it costs to make each unit and the actual price. Consumption — Demand and Supply 4 Market Demand • To obtain market demand for good 1 from individual demands, simply add them all up: X1(p1, p2; m1, . . . , mn) = Xn i=1 x i 1 (p1, p2, mi) • The demand curve is written D(P) and will look something like this: ................................................................................................................................................................................................................................................................................ . .......................................................................................................................... 0 P X CS D(P) P ∗ X∗ . . . . . • The inverse demand function P(X) is often used, and is simply calculated by finding price in terms of quantities from D(P). It measures the marginal rate of substitution of every consumer purchasing the good. • Note aggregate demand is a function of all other prices and incomes. It will shift given a change in these variables. For example, if the good is normal and there is an increase in income levels it will shift to the right. • Adding each individual’s consumer surplus gives the market consumer surplus. The area behind the demand curve