PM P1: Economic Welfare

What is Society's Welfare?

The sum of consumers' surplus and producers' surplus.

What is Consumer Surplus?

The difference between the maximum amount that consumers are willing and able to pay for a given quantity of a good and what they actually pay.

What is Consumer Surplus in a diagram?

Area above the price line and below the demand curve.

What is Producer Surplus?

The difference between the amount received by producers for selling their good and the minimum prices that they are willing and able to accept for supplying additional units of the good.

What is Producer Surplus in a diagram?

Area above the supply curve and below the price line.

What is Economic Efficiency?

Broadly means the best possible use of resources, existing when both allocative and productive efficiencies are achieved.

What is Allocative Efficiency?

The situation in which the society produces and consumes a combination of goods and services that maximises its welfare. It is achieved when goods and services wanted by the economy are produced in the right quantities.

What is Productive Efficiency?

Achieved when all resources are fully and efficiently utilised. This gives rise to firms using the least cost method of production for a given amount of output.