Consumer and Producer Surplus- Micro Topic 2.6 (Holiday Edition)

Hey, I'm Jacob Clifford, welcome

to ACDC Econ. Well, it's the

holidays, a great time to drink

hot chocolate, learn about consumer

surplus, producer surplus,
and deadweight loss,

then go outside and play in the snow.
Oh!

[♪ Deck the Halls (Instrumental)
by Jingle Punks ♪]

Okay here we go. Let's look

at the market for santa hats.

The demand basically shows a
number of people

who are willing to buy hats at
different prices.

If the price is high

then less people want to buy hats,

and if the price is low

then more people want to buy them.

The supply shows the

number of producers

that are willing to make hats.

If the price is low,

then very few producers want

to make them. If the price is high,

then more producers want to

make more hats.

Supply and demand come together

and set the equilibrium price
and quantity,

let's say five dollars and 4,000 hats.

[Children] Five dollars
and 4,000 hats.

[Clifford] Now the demand curve

shows that someone out there is

willing to pay eight dollars. They didn't,

they paid five dollars.

That's called consumer surplus.

It's the difference between

what you're willing to pay

for something and what you actually

do pay. The area of combined

consumer surplus is this
triangle right here.

But what about the person who's

willing to pay only four dollars?

Well, they don't get it, they

don't value hats enough.

Now, the supply curve shows

that there's a producer with a super

low opportunity cost that's
willing to sell

hats for two dollars. But every
producer that's

going to sell hats for less
than five dollars

makes producer surplus.
It's the difference

between the price and what a seller is

going to sell something for.

But what about the producers

that are willing to sell hats

but only if they can make more than

five dollars? Well, they don't

make a sale, their costs are just

too high. The combined producer

surplus is the triangle right here,

and so consumer surplus

plus producer surplus, or

total surplus, is right here.

Now take a step back and look

what's happening. Markets are

extremely efficient at allocating

or distributing resources.

The people who want Santa Claus hats

the most get it and they're

made by producers with the lowest possible

costs, that's awesome.

Thanks, markets.

But what happens when a market's

not at equilibrium? Well, let's

say the government establishes the

price ceiling at three dollars. At

that low price consumers want to buy

6,000 units but the producer is

only going to produce 2,000 units.

That's called a shortage, and the resut

is deadweight loss. Now the question is,

do you see it?

Pause the video, see if you can

figure out where's producer surplus,

consumer surplus, and this new thing

called deadweight loss.

Play in the snow.

Oh god.
It's in my mouth.

[Woman] I totally missed you.

[Clifford] Yeah you did.

Okay, now that the price is lower,

the producer surplus gets lower,

it's right here. All producers that are

willing to sell above three dollars

are now out of the market. Since now

there's less output, the consumer

surplus is right here, it's the difference

between what consumers are willing

to pay and what they actually did pay,

three dollars. That means the deadweight

loss is right here. It represents the loss

efficiency that occurs when the market

doesn't reach equilibrium. We're not

making the amount that society actually

wants. When you compare the two markets,

one at equilibrium and the one with the

price ceiling, you can tell that
it's inefficient.

There's some consumer surplus and

producer surplus that's missing, and

so consumers and producers can benefit

if we produce more output. Does it make

sense? Okay, let's do it again this time,

except let's see what happens when

there's a price floor. Now, the government

says the price can't go lower than

seven, and the result is a surplus.

Producers want to make 6,000 units,

but consumers are only willing
to buy 2,000 units.

The question is, where's consumer surplus,

producer surplus, and deadweight loss?

Play in the snow. Oh you got me that time.

[Woman laughing]

The price is higher, so consumer surplus

becomes smaller, it's right there,

and the producer surplus is right here,

so right there's the deadweight loss.

Did you get that? Again, it's easy to see

if we produce too little output,

we're going to end up with
deadweight loss.

If you're enrolled in a
microeconomics class

get used to this idea of deadweight loss,

it comes up all the time when you see

taxes and tariffs, monopolies, and both

positive and negative externalities.

In every case there's something

preventing the market from achieving

the most efficient outcome altogether.

Deadweight loss is one of the
most important

concepts in microeconomics.

[Students] Deadweight loss is

one of the most important

concepts in microeconomics.

[Clifford] Bonus round. Let's use the

supply and demand graph to show that

Christmas shopping actually causes

deadweight loss. Markets
adjust to consumer

demand. So when you buy things

for yourself, then markets are generally

efficient, there's no deadweight loss.

But when your Aunt Clara gives you

a gift that you don't really want

or that she paid a whole lot more for

than you would, that causes
deadweight loss.

The demand curve shifts to the right

and so the quantity that society

actually wants is here, but the quantity

actually produced is right here. The

result is deadweight loss. The graph

shows that the cost for each one of

these units are higher than the benefit

society has for them. These units

should have never been produced.

So now's a good time to call your aunt,

or maybe your grandparents, tell them

you're taking microeconomics and you're

learning about deadweight loss, and most

importantly, you prefer cash
at this Christmas.

Thanks for watching, until next time.

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For those who celebrate Christmas,

happy Christmas or merry Christmas,

and those who celebrate Hanukkah, happy

Hanukkah, for those people who Kwanzaa,

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Until next time.