MakingConsumer Surplus from Broadband InternettheConnectionHaving access to a broadband internet connection is beneficial forconsumers.We canmeasure just how beneficialitis by estimatingthe consumersurplus derived in the market.What would we need to know in order to do this?Thedemandcurveforbroadband internetserviceThepriceofbroadband internetservice@2015Pearson Education,Inc.11
© 2015 Pearson Education, Inc. 11 Making the Connection Consumer Surplus from Broadband Internet Having access to a broadband internet connection is beneficial for consumers. We can measure just how beneficial it is by estimating the consumer surplus derived in the market. What would we need to know in order to do this? • The demand curve for broadband internet service • The price of broadband internet service
MakingCS from Broadband InternetcontinuedtheConnectionIn 2006.the averagePricepricefor broadband(dollars persubscriber)internet service wasConsumersurplus$73.89frombroadbandIntemetservice$36 per month.36EconomistsShaneDemandGreenstein and RyanMcDevittestimatedtheQuantity047,000,000demand curve for(subscriberspermonth)broadbandinternetservice, shown on theright.CS=Area of shadedtriangle= 2 (47 - 0) ($73.89 - $36)= $890.4 million per month12@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 12 Making the Connection CS from Broadband Internet—continued In 2006, the average price for broadband internet service was $36 per month. Economists Shane Greenstein and Ryan McDevitt estimated the demand curve for broadband internet service, shown on the right. CS = Area of shaded triangle = ½ (47 – 0) ($73.89 – $36) = $890.4 million per month
ProducerSurplusProducer surplus can be thought of in much the same way asconsumersurplus.Producer surplus:The difference between the lowest pricea firmwould accept for a good or service and the price it actually receivesWhat is the lowest price a firm would accept for a good or service?The marginal cost of producing that good or serviceMarginal cost: the additional cost to a firm of producing one moreunitofagoodorservice@2015PearsonEducation,Inc.13
© 2015 Pearson Education, Inc. 13 Producer Surplus Producer surplus can be thought of in much the same way as consumer surplus. Producer surplus: The difference between the lowest price a firm would accept for a good or service and the price it actually receives. What is the lowest price a firm would accept for a good or service? The marginal cost of producing that good or service. Marginal cost: the additional cost to a firm of producing one more unit of a good or service
Measuring ProducerSurplus (SingleFirm)PriceProducer(dollarsHeavenly Tea is a (verysurplusProducerontheper cup)Producersurplussmall)producerofchaithird cupsurplusontheonthetea.secondcupfirstcupMarketprice$2.252.00CWhenthe market priceB1.75HeavenlyTea'sof tea is $2.00,Asupplycurve1.50HeavenlyTeareceives1.25producer surplus of$0.75 on the first cup(theareaof rectangleA),$0.50 onthe secondcup (rectangle B), and01234Quantity(cupsperweek)$0.25 on the third cup(a)ProducersurplusforHeavenlyTea(rectangle C).Figure 4.4aMeasuringproducersurplus14@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 14 Measuring Producer Surplus (Single Firm) Heavenly Tea is a (very small) producer of chai tea. When the market price of tea is $2.00, Heavenly Tea receives producer surplus of $0.75 on the first cup (the area of rectangle A), $0.50 on the second cup (rectangle B), and $0.25 on the third cup (rectangle C). Measuring producer surplus Figure 4.4a
Measuring Producer Surplus (Entire Market)The total amount ofPriceproducer surplus tea(dollarspercup)sellers receive fromSupplyTotal producersurplusselling chai tea can befromsellingchaiteacalculated by adding up$2.00fortheentire markettheproducer surplusreceived on each cupsold.Total producer surplus015,000Quantityis equal to the area(cupsperweek)(b)Totalproducersurplusinthemarketforchaiteaabove the supply curveand below the marketFigure 4.4bMeasuring producerprice of $2.00.surplus15@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 15 Measuring Producer Surplus (Entire Market) The total amount of producer surplus tea sellers receive from selling chai tea can be calculated by adding up for the entire market the producer surplus received on each cup sold. Total producer surplus is equal to the area above the supply curve and below the market price of $2.00. Measuring producer surplus Figure 4.4b