Chapter+7

Consumers, Producers, and the Efficiency of Markets

=KEY CONCEPTS:=
 * Welfare economics
 * Willingness to pay
 * Consumer surplus
 * Cost
 * Producer surplus
 * Efficiency
 * Equity

=OBJECTIVE: "How to maximize total welfare?"=

In this chapter, it is important to learn and understand how buyers and sellers benefit by entering in a market and how economists try to maximize efficiency and equity.

=Consumer Surplus=
 * Willingness to pay** is maximum amount of price a consumer is willing to pay for a product. For example, If John is a die hard fan of 50 Cent, John willing to pay for up to $100 for a concert ticket. On the other hand, Brain who is not as much into 50 cent as john is only willing to pay $10 for a concert ticket. Here, the price $100 and $10 are the willingness to pay for John and Brian.

Continuing with the previous example, let's imagine that 50 cent concert ticket costs $50. Since John's willingness to pay is $100, he will go to the concert and get a **consumer surplus (willingness to pay minus the actual cost)** of $50. On the other hand, Brian would not go to the concert because his willingness to pay, $10, is less than the actual price, $50.



=Producer Surplus= Just like there is the willingness to pay in consumer's point of view, there is a **cost (the amount of value the producer must give up to produce a good)** in producer's point of view. Cost is usually considered as the opportunity cost of the producer: the amount of time, input cost, and labor. For example, there are three lawnmowers who are willing to lawn your house. Each of them has a different set price for their labor. John is willing to lawn a house for $30, Jack for $50, and Brian for $70 in account of their costs.

With the information above, we can calculate the **producer surplus (the amount the producer is given minus the cost of production of a good)**. Let's imagine that Billy, owner of the house, is willing to pay up to $60 to hire a person to lawn his house. In this example, John and Jack will be willing to lawn the house because the payment, $60, is hire than their costs, $50 and $60. However, Brian would not take the job because his cost, $70, is hire than the payment. Therefore, John receives a producer surplus of $20 and Jack receives a producer surplus of $10.





=Market Efficiency= Now we have discussed about both consumer and producer surplus, it is time to analyze the total welfare of the society by looking at the **total surplus (consumer surplus + producer surplus)**. The calculation of total surplus can be easier in this equation:

**Total surplus = value to buyers - cost to sellers**

 * A market is considered **efficient** if it maximizes the total surplus
 * A market is in **equity** if the share is evenly distributed to both buyers and sellers
 * In a market equilibrium:
 * buyers who value to good more than price will buy the good.
 * sellers who can produce at the least cost will sell the good.



=CONCLUSION=

=== It is important to understand the consumer and producer surplus in a market through analyzing the willingness to pay and cost of buyers and sellers. This in result, adds up to the total surplus of the market, reaching efficiency at the market equilibrium. ===