Explain consumer surplus and producer surplus? Explain efficiency, gain and dead weight loss in monopoly and perfect competition?

1. ASSIGNMENT NO. 1
Economics
SUBMITTED TO
Ma’am Ayesha Naseem
SUBMITTED BY
Sehrish Afzal
6145-FMS/MBA/F13
MBA-27-A
Date: 21-5-2014

2. Q: 01
Explain consumer surplus and producer surplus?
Ans: Producer surplus
An economic measureof the difference between the amount that a
producer of a good receives and the minimum amount that he or she would be
willing to accept for the good. The difference, or surplus amount, is the benefit that
the producer receives for selling the good in the market.
For example,
A producer is willing to sell 500 widgets at $5 a piece and consumers arewilling to
purchasethese widgets for $8 per widget. If the producer sells all of the widgets to
consumers for $8, it will receive $4,000. To calculate the producer surplus, you
subtractthe amountthe producer received by the amount it was willing to accept,
(in this case $2,500), and you find a producer surplus of $1,500 ($4,000 - $2,500).
Consumer surplus
An economic measureof consumer satisfaction, which is calculated by
analysing the difference between whatconsumers arewilling to pay for a good or

3. servicerelative to its market price. A consumer surplus occurs when theconsumer is
willing to pay more for a given productthan the currentmarket price.
Consumers always liketo feel like they are getting a good deal on the goods and
services they buy and consumer surplus is simply an economic measure of this
satisfaction.
For example, assumea consumer goes out shopping for a CD player and he or she is
willing to spend $250. When this individual finds that the player is on sale for $150,
economists would say that this person has a consumer surplus of $100.
Economic welfare
Economic welfare is the total benefit available to society froman economic
transaction or situation. Economic welfare is also called community surplus. Welfare
is represented by the area ABE in the diagram below, which is made up of the area
for consumer surplus, ABP plus the area for producer surplus, PBE.

4. In marketanalysis economic welfare at equilibrium can be calculated by adding
consumer and producer surplus. Welfareanalysis considers whether economic
decisions by individuals, organisations, and the governmentincreaseor decrease
economic welfare.
Price discriminationandconsumer & producer surplus
Pricediscrimination occurs when a firm charges a different price to
different groups of consumers for an identical good or service, for reasons not
associated with the costs of supply. Is pricediscrimination something that
economists should be supporting in terms of the behaviour of businesses and final
outcomes in different markets?
Pure (1st degree) discrimination
With 1stdegree price discrimination the firmis able to perfectly segment the
market so that the consumer surplus is removed and turned into producer surplus.
Thus there is a clear transfer of welfare fromconsumers to producers. This is shown
in the next diagram.

5. Third degree (or multi-market) price discrimination involves charging different
prices for the same productin different segments of the market. The key is that
third degree discrimination is linked directly to consumers’ willingness and ability to
pay for a good or service. Itmeans that the prices charged may bear little or no
relation to the cost of production. Clearly the price elasticity of demand is the key
factor determining the pricing decision for producers for each part of the market.

6. Q: 02
Explain efficiency, gain and dead weight loss in monopoly and perfect competition?
Ans: PERFECT COMPETITION
There should not be any deadweight loss in a perfectly competitive
market becausein perfect competition, market equilibrium is reached when
marginal revenueis equal to marginal costwhich is equal to the going price. Recall
fromsupply/demand diagramthat marginalrevenue is the demand curveand
marginal costis the supply curve. Firms in perfect competition are price-takers, they
cannot influence the price, and each firm must accept same, going price to stay in
business. If they raisethe price, no one wants to buy something that expensive
when they can get it cheaper elsewhereso the firm goes out of business.
If they decreasethe price, the firm loses profit and must go out of business. So a
perfectly competitive firmmust accept the marketprice. This price is equal to

7. marginal revenuewhich is also equal to marginal costat the price, quantity location
on your diagram. When marginalrevenue is equal to marginalcost, what we gain is
what wepay out, so there is no long-run profit and there is no deadweight loss
because our firm is not losing or gaining anything in the long run, yet society has
many businesses to supply similar products at the same price. This is efficient (no
deadweight loss) becausemarginal costis equal to the going price which is equal to
marginal revenueor MC=MR=P (this is necessary for perfectcompetition to occur).
Deadweight losses may occur through legislation, lobbying for marketpower, or no
rules against monopolies and oligopolies in which cases the price is above marginal
cost becausethe monopolists/oligopolies havethe power to raise the price above
marginal cost. This creates a deadweightloss to society. Also, certain taxes can shift
supply and demand which creates deadweight losses as well.
MONOPOLY:
The outcome of a competitive market has a very important property. In equilibrium,
all gains fromtrade are realized. This means that there is no additional surplus to
obtain fromfurther trades between buyers and sellers. In this situation, we say that
the allocation of goods and services in the economy is efficient. However, markets
sometimes fail to operate properly and not all gains from trade are exhausted. In
this case, some buyer surplus, seller surplus, or both are lost. Economists call this a
deadweight loss. The monopolistproduces a quantity such that marginal revenue
equals marginalcost. The price is determined by the demand curve at this quantity.
The deadweight loss fromthe tax measures the sumof the buyer’s lostsurplus and
the seller’s lost surplus in the equilibrium with the tax. The total amount of the
deadweight loss therefore also depends on the elasticity of demand and supply. The
smaller these elasticity, the closer the equilibrium quantity traded with a tax will be
to the equilibrium quantity traded without a tax, and the smaller is the deadweight
loss.