Unit 4: Consumer and producer surplus, market interventions, and international trade

Consumer surplus

The welfare or benefit enjoyed by consumers who pay a price lower than the price they would have been willing to pay. Graphically the area below the demand curve and above the price in the market.

Producer surplus

The welfare or benefit enjoyed by producers who sell for a price higher than the price they would have been willing to sell for. Graphically the area above the supply curve and below the price in the market.

Total welfare (total surplus or community surplus)

The sum of consumer and producer surplus. Represents the total monetary benefit of consumers and producers who feel they got a good price for a product.

Allocative efficiency

When market output occurs at a quantity and price at which MB=MC. Neither too much nor too little is produced, and resources are allocated efficiently.

Allocative inefficiency

When a market is allocatively inefficient, the MB is not equal to MC at the prevailing price and quantity combination. Either too much or too little of the good is being produced

Deadweight loss (DWL)

DWL is the loss of total welfare resulting from a market producing at an allocatively inefficient price and quantity combination.