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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 it about
Wezem Reply
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Prosper Reply
I need some help in economics
adepojurafiu
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Effah
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Wezem
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Effah
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adepojurafiu
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Humaira
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Ukpen
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igwe Reply
disaster management cycle
Gogul Reply
cooperate social responsibility
igwe
Fedric Wilson Taylor also define management as the act of knowing what to do and seeing that it is done in the best and cheapest way
OLANIYI
difference between microeconomics and macroeconomic
Ugyen Reply
microeconomics is the study of individual units, firm and government while macroeconomics is the study of the economic aggregates.
okhiria
The classical theory of full employment
Lovely
what is monopoli power
Adzaho Reply
the situation that prevails when economic forces balance so that economic variables neither increase nor decrease
Bombey
what is equilibrium
Kabir
what are the important of economic to accounting students with references
salihu Reply
Economics is important because it helps people understand how a variety of factors work with and against each other to control how resources such as labor and capital get used, and how inflation, supply, demand, interest rates and other factors determine how much you pay for goods and services.
Muhammad
explain the steps taken by the government in developing rural market?
Azeem Reply
ask buhari
okhiria
contribution of Adam smith in economics
abel Reply
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Dexter
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Patrick
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AS
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Umarou
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Amir
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AS
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Amir
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Effah Reply
Pls, I need more explanation on price Elasticity of Supply
Isaac Reply
Is the degree to the degree of responsiveness of a change in quantity supplied of goods to a change in price
Afran
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Humaira
Okay what is land mobile and land unmobile
scor
And what are the resources in land
scor
what is production
Humaira
the proces of using the services of labor and equipmnt together with other in puts to make goods and services availble
Bombey
Okay what is land mobile and land unmobile
scor
Discuss the short-term and long-term balance positions of the firm in the monopoly market?
Rabindranath Reply
hey
Soumya
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Mitiku
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Mitiku
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Soumya
through hard study and performing well than expected from you
Mitiku
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Soumya
prepare first, in psychologically as well as potentially to sacrifice what's expected from you, when I say this I mean that you have to be ready, for every thing and to accept failure as a good and you need to change them to potential for achievement of ur goals
Mitiku
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Soumya
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Rabindranath
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Mitiku
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Momoh
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Isaac
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Isaac
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Afran
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Afran
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OLANIYI
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OLANIYI
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OLANIYI
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OLANIYI
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akinwale
am from Ghana
Jacob
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Charles
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akinwale
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Dev
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OLANIYI
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Lerato
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Umarou
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Umarou
hi
Humaira
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Liaqat
what is firms
Anteyi Reply
A firm is a business entity which engages in the production of goods and aimed at making profit.
Avuwada
What is autarky in Economics.
Avuwada
what is choice
Tia Reply
So how is the perfect competition different from others
Rev Reply
what is choice
Tia

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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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