Market Equilibrium and Consumer and Producer Surplus

Market Equilibrium

• when quantity supplied > quantity demanded, there is a price surplus

• when quantity supplied < quantity demanded, there is a price shortage

• when quantity supplied = quantity demanded, there is a market price equilibrium

Consumer Surplus Introduction

• you can view the marginal benefit curve as a demand curve

• consumer surplus occurs when consumers are willing to pay more for a good or service than the market price

• the difference between willingness to pay for a good and the price that consumers actually pay for it

Producer Surplus

• occurs when producers receive a higher price for a good or service than the minimum price they are willing to accept

• the difference between producers cost of production and the market price

Equilibrium, Allocative Efficiency, and Total Surplus

• Equilibrium

  • where quantity demanded = quantity supplied

  • the market clears → no shortage or surplus

  • this is the most stable price + quantity combo

• Allocative Efficiency

  • happens at equilibrium

  • mb = mc

  • resources are used in a way that maximizes total benefit to society

  • the goods produced are what people value most

  • no deadweight loss at this point

• Total Surplus = consumer surplus + producer surplus

  • it's the total net benefit to everyone in the market

  • maximized at equilibrium

  • area between the demand and supply curves, from 0 to equilibrium quantity

• Deadweight Loss (DWL)

  • happens when market is not at equilibrium

  • represents lost total surplus

  • caused by things like price controls, taxes, monopolies, etc.

Changes in Equilibrium Price and Quantity when Supply and Demand Change

• Shifts in Demand:

  • Increase in Demand:

    • The demand curve shifts to the right

    • At the original price, there's a shortage

    • Result: Higher equilibrium price and higher equilibrium quantity

• Decrease in Demand:

  • The demand curve shifts to the left

  • At the original price, there's a surplus

  • Result: Lower equilibrium price and lower equilibrium quantity

• Shifts in Supply:

  • Increase in Supply:

    • The supply curve shifts to the right

    • At the original price, there's a surplus

    • Result: Lower equilibrium price and higher equilibrium quantity.

• Decrease in Supply:

  • The supply curve shifts to the left

  • At the original price, there's a shortage

  • Result: Higher equilibrium price and lower equilibrium quantity

• Simultaneous Shifts:

  • When both supply and demand shift, the effect on equilibrium price and quantity depends on the magnitude and direction of each shift