Figure 3 A Consumers Demand for Gasoline

per ga lion per ga lion

Consumer surplus from the second gallon (54.50 - $3.00 = $1.50)

C'onsumcr surnlus from ihe 5 gallons - $5.00

Demand = Marginal Bencfn (MB)

Consumer surplus from the second gallon (54.50 - $3.00 = $1.50)

C'onsumcr surnlus from ihe 5 gallons - $5.00

Market price

Demand = Marginal Bencfn (MB)

Gallons per week riii: supply cifvc arid pro:u!z:.:: surplus.

Under certain assumptions (perfect markets), the industry supplv curve is also the marginal societal (opportunity) cost curve. Producer surplus is the excess of the market price above the opportunity cost of production. For example, in Figure 4, steel producers are willing to supplv the 2,500th ton of steel at a price of $400. Viewing the supplv curve as the marginal cost curve, the cost in terms of the value of other goods and services foregone to produce the 2,500th ton of steel is $400. Producing and selling the 2,500th ton of steel for ยง500 increases producer surplus by SI00. The difference between the total (opportunity) cost of producing steel and the total amount that buyers pay for it (producer surplus) is at a maximum when 3,000 tons are manufactured and sold. This is illustrated in Figure 4.

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