Chapter 8: Consumer and Producer Surplus

willingness to pay

the maximum price someone is willing to spend on a good or service. This value reflects how much the buyer values the good.

what does it mean if a buyer pays more than there willingness to pay.

paying more would mean the cost outweighs the expected benefit

consumer surplus

a buyer’s individual willingness to pay minus the price actually paid. 

marginal buyer

the individual who would be the first to exit the market if the price increases. different sections of the curve have different marginal buyers.

how to determine marginal buyer by looking at a graph

the height of the demand curve shows the marginal buyers willingness to pay.

total consumer surplus

the sum of the individual consumer surpluses for every buyer in a market.

what does consumer surplus measure

it provides an objective way to assess the benefits buyers receive in a market, which is useful when comparing outcomes, evaluating market failures, or assessing govt policies.

sellers cost

the value of everything they must give up to provide a good or service. Also known as opportunity cost. 

what is sellers cost also known as?

it is known as willingness to sell because cost is the minimum price they are willing to accept.

producer surplus

is the difference between the price they receive and their willingness to sell. Their net gain from selling a good.

marginal seller

this is the seller who would be first to leave the market if the price dropped

total producer surplus

the sum of individual producer surpluses of all sellers in a market.

what does producer surplus measure?

it allows economists to objectively quantify the benefits that sellers gain and to compare outcomes across different market outcomes.

how to get total surplus?

if we add consumer surplus and producer surplus, which represents the combined economic well being of everyone in society. 

equation for total surplus?

total surplus = consumer surplus + producer surplus OR total surplus + (value to buyer - price paid by buyers) + (price paid to sellers - Sellers Costs) OR Total surplus = value to buyers - seller’s costs

when do economists define an allocation of resources as efficient

if it maximizes total surplus.

what are sources of inefficiency

when total surplus is not maximized. When goods aren’t consumed by buyers who value them most, when goods are not produced by the sellers with the lowest costs. Both lower the surplus

is total surplus fair?

an allocation may be efficient but not fair, it can result in an uneven or inequitable distribution of benefits. That is, the total surplus may primarily flow to a small group of people. Goods are allocated to buyers who value them most and sellers with the lowest costs

does welfare economics tell what is fair?

it tells what is efficient not what is fair