ECON 200 Chapter 5 (efficiency)

Consumer surplus

- Consumer surplus is the net benefit that a consumer receives from purchasing a good or service. - Consumer surplus is measured by the difference between willingness to pay and the actual price. - Willingness to pay- spending= consumer surplus

Deadweight loss

- Deadweight loss = Surplus "lost" (or surplus unobtained) - Deadweight loss exists if total surplus could be increased - occurs if the market is not in equilibrium

producer surplus

- Producer surplus is the net benefit that a producer receives from the sale of a good or service. - Producer surplus is measured by the difference between willingness to sell and the actual price - Price received- willingness to sell= producer surplus - the area above the supply curve and below price, between quantity zero and the quantity firms choose to produce

Total surplus

- Total surplus is a measure of the combined benefits that everyone receives from participating in an exchange of goods or services. - Total surplus is the sum of consumer surplus and producer surplus.

willingness to pay

- the maximum price that a buyer would be willing to pay for a good or service. - At any quantity on the graph, 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. - willingness to pay= demand

willingness to sell

- the minimum price that a seller is willing to accept in exchange for a good or service. - willingness to sell= supply

why is market equilibrium a good place to be

Bc you've produced all of the units where the benefits equal the cost

efficiency

efficiency= maximum total surplus - The consumers and the producers win - Both buyers and sellers are better off in equilibrium