Consumers, Producers, and the Efficiency of Markets

Welfare economics

Welfare economics: distribution of resources in order to determine economic wellbeing.

  • buyers and sellers receive benefits from receiving benefits from part of the market
  • the equilibrium in price and quantity in the market bring the total welfare of consumers and producers to max point.


Consumer Surplus

Willingness to pay: the amount of money that the buyer is willing to pay for a product

  • Willingness to pay determines the amount of how much the buyer values the product.
  • Consumer Surplus: The amount of money that the buyer gets from the amount of money that the buyer paid compared to his willingness to pay.

Using Demand Curve to Measure Consumer Surplus

  • consumer surplus is directly related to demand curve on a certain product.

  • the market demand curve portrays many types of quantities which buyers are able to pay for at different prices in their willingness to pay.

The area of consumer surplus:

  • consumer surplus measures the profit that the buyers get from a product that the buyers identify.
  • Rational people, in other words, normal people do anything in order to get anything when they are given opportunity.
  • consumer surplus reproduce on economic wellbeing.


Producer Surplus

  • Producer surplus: the money that the seller is paid for, compare to its actual cost.
  • the accounting profit
  • price per unit
  • cost per unit (total cost)
  • measures any extra benefits that the sellers receive from the market.

Using Supply Curve to Measure Producer Surplus

  • Producer surplus is directly related to supply curve
Producer Surplus’s area

Market Efficiency

  • Consumer Surplus:
    • Value to buyers – Amount paid by buyers
  • Producer Surplus:
    • Amount received by sellers – cost to sellers
  • Total surplus:
    • Consumer surplus + Producer surplus
    • Value to buyers – cost to sellers


Evaluating Market Equilibrium

-Three insights about Market outcomes:

1. Free Market distribute supply to the people who needs the product the most. This is determined by buyer’s willingness to pay

2. Free Market distribute the demand of a product to the people who can make them with the most small amount of cost

3. Free Market determines the highest point of quantity, producer surplus + consumer surplus

When the planner can leave the market outcome, that means that the equilibrium outcome is efficient. This is explained by French word, Laissez faire, which means “allow them to do”

Questions& Answers