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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

how can I choose a model for analyzing primary data?
Dipsikha Reply
economics is science because it used sciencetific ways in solving it problem
Mhizz
Is economics a science, more expanciate
Saliman Reply
Analyse Eskom in terms of the characteristics of a monopoly
Brilliant Reply
microeconomics deals with individuals and firms while macroeconomics deal with the activities of the society in large
C-Stixxs Reply
Morning guys I need questions under any topic in economics
C-Stixxs
what is your question
Shalom
why Economics is science
Fixed Reply
Ok
Olamilekan
what is economic
Arome Reply
is a science which studies human behavior as a relationship with ends n scarce which have alternative uses
C-Stixxs
Explain four reason why scale of preference is necessery
Afusat Reply
What's a perfectly elastic demand
jessica Reply
what is the perfect elasticity of demand
Beltus
what is a balance budget
Azayi Reply
balance budget is when the expenses ND tax re equal
Joseph
it is when expenditure and revenue are equal
C-Stixxs
types of cost curves
Lonwabo Reply
there are different types Average total cost curve (ATC) Average Variable cost curve (AVC) Marginal cost curve (MC) .......... and so on
C-Stixxs
what is histogram
Stella Reply
What is the reason for demand
Taye Reply
please my question is 1. the relationship between quantity of goods supplied and price, is said to be what? 2. The relationship between quantity of goods demanded and price, is said to be what?
isah
1. Is said to be positive 2. Is said to be negative
Eric
hello good afternoon
sheriffvandy Reply
Hi
Tahira
hello
Divakar
hello
Shekerusegun
what is production possibility curve
Amina Reply
A curve that shows different combinations (amount) of two goods with a production of limited resources (it is based on the Scarcity principle)
Minalu
How demand and supply are related
Alimamy Reply

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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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