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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

What is the difference between pure monopoly and natural monopoly
Joseph Reply
what is price elasticity demand
Alex
hello my name is Godwin David am an economics student
GODWIN Reply
what's the opportunity cost for free goods?
Bah
what is the demand and supply of QD is equal to 4040 thousand
Prince Reply
uses and limitations of elasticity of demand concept
Tinodaishe
Elasticity of demand refers to the degree of responsiveness of quantities
grace Reply
Thanks
Ogbonna
Hi everyone
Ogbonna
I need all the formula for elasticity of demand
Dogbeda Reply
%∆QD/%∆P formula for elasticity of demand
divine
for that of income elasticity %∆QD / %∆I
divine
and that of cross elasticity of demand %∆QDx / %∆Py
divine
economics is a science which studies human behavior and it's alternative uses as means and scarce resources
Joycelyn Reply
given that following demand and supply equation
Issah Reply
factors affecting demand and supply
Francis Reply
consumer's chioce price substitute effect quality of product
Arsh
Why is economics study as a human
Freda Reply
what is economics
Bakarr
hello How are you doing
Sanni
Economics is a social science that studies human behavior as a relationship between ends and scarce means which has alternative uses.
IBITOYE
what is a trade union
Mary Reply
function of trade union
Mary
function of trade union
Mary
different between demand and supply
Francis Reply
importance of demand
Khalfan
what is the demand and supply of Qd=40,000-6P Qs=14P-28,000 the equilibrium price
Rocky Reply
3400
Ram
pls, show workings
Olowe
yes work
Collins
what is economics by Adams smith
Diana Reply
economics by Adams Smith's
Francis
to earn wealth more and more
Ram
An inquiry to nature and causes of wealth to the nature
IBITOYE
what are the poor performance of the monopolies
Thandolwethu Reply
it controls only price or production not both a same time
Ram
Difference between demand and supply
Kareem Reply
demand talks about the consumers and supply also talks about producers
Bright
demand talks about the relationship between price and the quantity demanded for a certain goods and supply talks about the relationship between price and quantity supply of a certain goods .
Mutala
demand show the quality demanded at different price n time whereas supply show the quality ready to sell in market by seller at different price n time.
Ram
is it true that when price decrease quantity demand also increase
Prince

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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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