Consumer and Producer Surplus

Consumer's willingness to pay: Maximum price a consumer will pay for a good.
Individual consumer surplus: Gain from purchasing a good; difference between price paid and willingness to pay.
Total consumer surplus: Sum of individual consumer surpluses in a market.
Consumer surplus generally refers to both individual and total surplus.
Consumer surplus is the area below the demand curve but above the price.
Consumer surplus rises with a fall in price.

Producer surplus: Difference between market price and the price at which firms supply the product.

Competitive markets are usually efficient:
- Allocate consumption to buyers who value it most.
- Allocate sales to sellers who value the right to sell most (lowest cost).
- Ensure mutually beneficial transactions.
- Ensure no mutually beneficial transactions are missed.
Caveats to efficiency:
- A market may be efficient but not necessarily fair.
- Markets sometimes fail to deliver efficiency.
- Maximizing total surplus doesn’t guarantee the best outcome for every individual.

Well-functioning markets are effective due to:
- Property rights: Rights of owners to dispose of valuable items.
- Economic signals: Information that helps people make better economic decisions.
- Prices: Convey information about costs and willingness to pay.

Prices translate complex information into a simple signal for producers.
- Profits rise when consumers want more of a product.
- Profits decline when consumers want less of a product.