Chapter+7+(JEM)-+Consumer,+Producers,+and+the+Efficiency+of+Markets

Consumers Surplus

Consumer surplus measures the benefit to buyers of participating in a market. Demand curve is basically measure of willingness to pay. For example: If Min is willing to pay $50 dollars for a good and if market sell it for $25, than I benefited $25. Consumers surplus can be calculated willingness to pay for a good minus the amount the buyers actually pays.

Producers Surplus

Producers surplus measures the benefit to sellers of participating in a market. Supply curve is basically measure of cost. For example: If it cost $15 for Min to make ice cream and he sell it for $35, then the Min surplus will be $20. Producers surplus can be calculated price of good minus the cost.

Market Efficiency

Total surplus= Value to buyers - cost to sellers.

Efficiency is resource allocation of maximizing the total surplus received by everyone of society.

Equity is the fairness of the distribution of well-being among the members of society.

Willingness to Pay? ---> Demand Curve Willingness to Buy? ---> Supply Curve

Then how do we know what are the surpluses for the demanders and suppliers? Take a look at below:



Yes, Consumer surplus and Producer surplus are those area bounded between each curves and the price of goods

Adding those two.... becomes: (pic 2)

Total Surplus!

[|efficiency vs equity]
 * A sort of debate website on Equity vs Efficiency

Questions: 1) Define total surplus. 2) How would you maximize total surplus? 3) Calculate the total surplus in pic 2.

Answers: 1) Total surplus is the consumer's surplus (willingness to pay minus the price) plus producer's surplus (price minus cost of production). 2) Total surplus would be maximized at the market equilibrium. 3) (1000ㅡ300)*1 + (800ㅡ500)*1 = $1000