Consumer and Producer Surplus

consumer's willingness to pay

the maximum price at which a consumer would buy a good; different consumers = different willingness to pay

well functioning markets are efficient because of:

1.) property rights - when you buy a good, you are the owner 2.) economic signals - prices acting as signals

3 ways you might (unsuccessfully) try to increase total surplus in competitive markets

1.) reallocate consumption among consumers 2.) reallocate sales among sellers 3.) change in quantity traded *key takeaway point: you shouldn't try to interfere with the market

competitive markets are usually efficient in these ways:

1.) they allocate consumption of the good to the potential buyers who most value its consumption 2.) they allocate sales to potential sellers who most value its sale (e.g. who have the lowest cost) 3.) ensure that all transactions are mutually beneficial - every consumer who makes a purchase values the good more than every seller who makes a sale

total producer surplus

area above the supply curve but below the price (triangle)

total consumer surplus

entire shaded area on graph - the sum of the individual consumer surpluses; areas above the market price line on graph (formula: area = 1/2 (base x height)

consumer surplus

the difference between market price and what consumers are willing to pay

producer surplus

the difference between the market price and what the producers are willing to sell for; the difference (vertical distance) between market price and the price willing to sell; the shaded area between market price and supply curve

total surplus

the sum of producer and consumer surplus

total surplus

the sum of producer and consumer surplus; maximized at market equilibrium

what happens when other consumers enter the market

they add more surplus and as a consequence total consumer surplus increases

consumer surplus rises...

with a fall in price (makes intuitive sense - more money you can save)