The Laws of Demand and Supply

Diminishing Marginal Utility

• Principle of Diminishing Marginal Returns: general tendency for marginal utility to decrease as the quantity of a good consumed increases– Can be used to determine one’s individual

demand curve for a product– Measured in units of utility

Consumer Surplus

• Consumer Surplus = marginal benefit from a good minus the price paid for that good, summed over the quantity consumed

• How to calculate consumer surplus…

Producer Surplus

• Producer Surplus: amount seller is paid minus the seller’s cost– Also the area under the

equilibrium price and above the supply curve

– How to calculate producer surplus…• (HINT: Same way as

consumer surplus…)

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