Question

Identify whether each of the following statements best illustrates the concept of consumer surplus, producer surplus, or neither. Even though I was willing to pay up to $47 for a jersey sweater and even though the seller was willing to go as low as $40 in order to sell it, we couldn't reach a deal because the government imposed a price floor of $57 on the sale of sweaters. I sold a used textbook for $38, even though I was willing to go as low as $30 in order to sell it. Even though I was willing to pay up to $66 for a watch, I bought a watch for only $60.

Answer 1

1. Here, the government set a price floor of $57 on the sale of the weater. That means that the market price was set at $57 but we were expecting some profit by selling it at $47 (which would not be possible now) . Also, if the customer would have bought the item for $40 , he would have gained (which would not be possible now). So both the producer of the product (I) and the consumer (customer) are not benefitting from the sale of the item. Therefore, there is no surplus. Therefore, the answer is Neither. The other two questions answered below will make the concept clearer

2. Here, the case describes how much are you willing to sell the product for i.e we are selling some product and not buying. According to us the price of $30 was our price we were comfortable with so we can call it market price here.But we sold the book for $38 and thus gained $8 in the transaction. So, Producer surplus is an economic measure of the difference between the amount a producer of a good receives and the minimum amount the producer is willing to accept for the good. The difference, or surplus amount, is the benefit the producer receives for selling the good in the market. Therefore, we are talking about producer surplus here.

3. Since I can afford the watch for $66 that is $6 higher than the actual cost of the watch ($60) the answer is consumer surplus because the net gain that a buyer achieves from the purchase of a good is called that buyer’s individual consumer surplus. i.e Consumer surplus is defined as the difference between the total amount that consumers are willing and able to pay for a good or service (indicated by the demand curve) and the total amount that they actually do pay (i.e. the market price).