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By the end of this section, you will be able to:
  • Contrast consumer surplus, producer surplus, and social surplus
  • Explain why price floors and price ceilings can be inefficient
  • Analyze demand and supply as a social adjustment mechanism

The familiar demand and supply diagram holds within it the concept of economic efficiency. One typical way that economists define efficiency is when it is impossible to improve the situation of one party without imposing a cost on another. Conversely, if a situation is inefficient, it becomes possible to benefit at least one party without imposing costs on others.

Efficiency in the demand and supply model has the same basic meaning: The economy is getting as much benefit as possible from its scarce resources and all the possible gains from trade have been achieved. In other words, the optimal amount of each good and service is being produced and consumed.

Consumer surplus, producer surplus, social surplus

Consider a market for tablet computers, as shown in [link] . The equilibrium price is $80 and the equilibrium quantity is 28 million. To see the benefits to consumers, look at the segment of the demand curve above the equilibrium    point and to the left. This portion of the demand curve shows that at least some demanders would have been willing to pay more than $80 for a tablet.

For example, point J shows that if the price was $90, 20 million tablets would be sold. Those consumers who would have been willing to pay $90 for a tablet based on the utility they expect to receive from it, but who were able to pay the equilibrium price of $80, clearly received a benefit beyond what they had to pay for. Remember, the demand curve traces consumers’ willingness to pay for different quantities. The amount that individuals would have been willing to pay, minus the amount that they actually paid, is called consumer surplus    . Consumer surplus is the area labeled F—that is, the area above the market price and below the demand curve.

Consumer and producer surplus

The graph shows consumer surplus above the equilibrium and producer surplus beneath the equilibrium.
The somewhat triangular area labeled by F shows the area of consumer surplus, which shows that the equilibrium price in the market was less than what many of the consumers were willing to pay. Point J on the demand curve shows that, even at the price of $90, consumers would have been willing to purchase a quantity of 20 million. The somewhat triangular area labeled by G shows the area of producer surplus, which shows that the equilibrium price received in the market was more than what many of the producers were willing to accept for their products. For example, point K on the supply curve shows that at a price of $45, firms would have been willing to supply a quantity of 14 million.

The supply curve shows the quantity that firms are willing to supply at each price. For example, point K in [link] illustrates that, at $45, firms would still have been willing to supply a quantity of 14 million. Those producers who would have been willing to supply the tablets at $45, but who were instead able to charge the equilibrium price of $80, clearly received an extra benefit beyond what they required to supply the product. The amount that a seller is paid for a good minus the seller’s actual cost is called producer surplus    . In [link] , producer surplus is the area labeled G—that is, the area between the market price and the segment of the supply curve below the equilibrium.

Questions & Answers

definition of choice?
Anick Reply
it refers to the act of selecting one alternative from the other
Donfack
State and explain three advantages and two disadvantages of capitalist economic system
Ghislain Reply
What is cross elasticity of demand
Justice Reply
Is a demand in which the of goods change over time.
Shadrick
How can I join
Shadrick
join what?
Castino
it measure the extend in which the quantity demanded of a good respond to change in price of other good.
Donfack
refers to sensitivity of quantity demanded in change of price of commodity
Daniel
What is balance of payments
Bah Reply
what are free good
Maillot Reply
how do you determine price change
Matri Reply
what is economics?
Yaya Reply
what is economic
Nana Reply
Economics is the study of how Individual consumer, institution and society as a whole uses its available finite resources to satisfy infinite needs and wants
Richard
Explain the following concepts using suitable exemple. 1) National budget. 2) National debt
Rosalie
what is international trade
BOBO Reply
other things remain constant.
Esale Reply
explain scarcity
Richard Reply
scarcity occurs when there are not enough resources to satisfy human's needs and wants therefore we need to allocate our resources using the price mechanism.
Isha
scarcity is when there is inadequate resources to catch the unlimited wants which would compel individual to make choice.
Prince
scarcity simply means when there's a shortages of resources to satisfy Hunan's need and wants in a particular time, which means the demand for it at the moment is higher than the supply
Abu
scarcity simply means when there's a shortages of resources to satisfy humans need and wants in a particular time, which means the demand for it at the moment is higher than it supply.
Abu
😂😂😂
Isha
That escalated real quick😂
Isha
scarcity is sometimes considered as the basic problems of economics resources r scarce because we live in a world of humans in which wants are infinite but the land labor and capital r required to satisfy those wants are limited
Nkwenti
scarcity means unlimited resources
Rena
resources are limited but human wants can not be limited
Himanshu
joint or complementary demand
Ryt Reply
what is demand
Qudus Reply
it maybe define as the amount or quantity of goods and services which a consumer is willing to buy with the ability to pay at a given price at a particular time
Habib
yesoo thanks dear
Gyamfua
Explain 3 reasons why the manufacturer may decide to sell directly to the consumers
Rosalie
reasons: 1.direct contact with consumer 2.he can fix his own prize to the commodity 3.he get the actual profit without the help of middle man
And
right
parvez
why is economics a science
Isaac Reply
Because science is all about thinking by making models whether a computational or Mathematical. Economics is a social sciences because it effects society but to understand Economics we use maths so it is a Science
Amit
hi
Mony
hello
Amit
I hope.......Economic is social science because it makes new new currency of money,it is decided the country’s depend system and the system be repeated others benefits in our ...
Anik
yeah
Habib
so what is the disadvantages of mix economic system
Habib
Economics is regarded as a social science because it uses scientific methods to build theories that can help explain the behaviour of individuals, groups and organisations.
Ali
The question is: why is Economic a "science" and not why is economics a "social science?" Alright folks?
Xavier
In my own understanding of why economics is a science it bcz it deals mainly on human resources just like biology that deals in the human body why economics is science it also deals on the management of human resources all over the world bcz without economics there will be no human resources
Ogbonnaya
what is technology
Nkwenti
my response to the earlier question is, economics is a science but not a pure science like biology, chemistry and physics. The reason is that those pure science study inanimate object while economics study human being, their experiment are predictable.
raimi
Economics is a social science subject that shows the relationship between ends and scarce means with their alternative uses
Ajenifuja
what is Equilibrium?
Fatima Reply
it means equal price and equal quality
Arthur
thank u Arthur!
Fatima
😇🙏
Fatima
Thanks
Moses
Equilibrium is a state of balance in an economy. In as far as market forces are reasonably concerned, equilibrium means the state at which the quantity of goods supplied is equal to the quantity of goods demanded.
Xavier
what is labour
Ayham
labor can be define as a both physical and mental effort of man put forward towards production
Habib
name the types of demand and explain any two
ALIMAMYISLA
Joint demand Composite demand Competitive demand
Ajenifuja
Labourcan be defined as man mental and physical exertion
Ajenifuja
equilibrium is a state of balance especially between opposing forces or influences
Nkwenti
equilibrium means the state of point in which a person is satisfied and after that point if that person consumes more than the satisfaction level will decrease.
Himanshu
Equilibrium is a state of balance in and economy. that mean equal privé and equal quality e.t.c.
Rosalie
Equilibrium is a situation in which economic forces such as supply and demand balance and in the absence of extremal lnfiuences the values of economic variables will not change.
Gyamfua

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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