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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