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CONSUMER AND PRODUCERS SURPLUS The consumers surplus This is the difference between the price a consumer is willing

to pay and the actual price he pays for the commodity. e.g. if a consumer goes to the market to buy 1 kg of meat at Shs 2000 but he finds the same kg at Shs 1500 he then enjoys the surplus of Shs 500 Alternatively consumers surplus to extra utility enjoyed by a consumer without paying for it. Graphically consumers surplus is represented by the area above the market price and below the demand curve. Mathematically consumers surplus is represented by the difference between total utility and marginal utility i.e. TU MU = consumers surplus. Question Study the table below and answer the questions that follow:-

i) ii)

calculate the consumers surplus Illustrate the level of consumers surplus on the graph

Price (Shs) 300 250 200 150 100 50

Quantity demanded 1 2 3 4 5 6 The producers surplus This refers to the difference between the price a producer is willing to charge and what he actually charges. Price Quantity supplied 1

Using Shs 150 as the fixed market price


350 400 450 500 550 650

2 3 5 6 7 8

MU TU MU = 550 x 6 = 3,300Shs TU = 300 + 350 + 400 + 450 + 500 + 550 + = 2250 Producers surplus = 3300 2200 = 750Shs Graphically producers surplus is represented by the above the supply curve and below the market price. Graphically it is shown as below: - supply MARKET EQUILIBRIUM When supply and demand are equal (i.e. when the supply curve and demand curve intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded.


Given the following functions: Qd = 36 4P Qs = -12 + 12P, Calculate the equilibrium price and quantity. SOLUTION

(iv). friends

Bribery, corruption and selling of scarce commodities to only

MINIMUM PRICE LEGISLATION (PRICE FLOOR) DEVIATIONS FROM EQUILIBRIUM Maximum Price Legislation: This is where the government sets the maximum price of a commodity such that it becomes illegal for one to buy or sell above that price. It is usually imposed in periods of scarcity of commodities. This is where the government fixes minimum prices of commodities such that it becomes for one to sell or buy below that price.

Effects of Maximum Price Legislation If the government sets the maximum price at OP2; (i). (ii). There would be excess demand. Artificial shortage of the commodity where sellers board

commodities to create shortage and sell at very high prices (iii). Black-market would prevail i.e. a market in which commodities are

sold illegally are prices that violate the restriction. Sellers would break the law and sell at very low prices behind the counters.