Chapter 7 Consumers Producers and the Efficiency of Markets Consumer Surplus welfare economics study of how the allocation of resources affects economic well being willingness to pay maximum amount that a buyer will pay for a good o eager to buy at a price less o refuse to buy at a price more o indifferent at that price consumer surplus amount a buyer is willing to pay minus the amount they actually pay area above price below demand curve o consumer surplus measures the benefit buyers receive from participating in a market At any quantity the price given by the demand curve shows the willingness to pay of the marginal buyer the buyer who would leave the market first if the price were any higher The area below the demand curve and above the price measures the consumer surplus in a market Total area below the demand curve and above the price is the sum of the consumer surplus of all buyers in the market for a good or service Consumer surplus is the area above the price and below the demand curve Consumer surplus measures the benefit that buyers receive from a good as the buyers themselves Consumer surplus is a good measure of economic wellbeing if policymakers want to respect the perceive it preferences of buyers Consumer surplus reflects economic wellbeing economists normally assume that buyers are rational when they maker decisions rational people do the best they can to achieve their objectives given their opportunities Producer Surplus cost value of everything a seller must give up to produce a good producer surplus the amount a seller is paid for a good minus the seller s cost of providing it area above supply curve below price area below the price and above the supply curve measures the producer surplus in a market o height of the supply curve measures the seller s costs and the difference between the price and the cost of production is each seller s producer surplus thus the total area is the sum of the producer surplus of all sellers producer surplus is the area below the price and above the supply curve Market Efficiency consumer surplus value to buyers amount paid by buyers produce surplus amount received by sellers cost to sellers total surplus value to buyers cost to sellers consumer surplus benefit consumers receive producer surplus benefit firms receive total surplus sum of benefits measures how well society is doing efficiency property of a resource allocation of maximizing the total surplus received by all members of society equality property of distributing economic prosperity uniformly among the members of society total area between the supply and demand curves up to the point of equilibrium represents the total surplus in this market Who should consume buyers who value the good more than the price choose to buy the good Who should produce sellers whose costs are less than the price choose to produce and sell the good What should we produce Goods that maximize total surplus Observations o Free markets allocate the supply of goods to the buyers who value them highly willingness o Free markets allocate the demand for goods to the sellers who can produce them at the o Free markets produce the quantity of goods that maximizes the sum of consumer and to pay least cost producer surplus
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