Principles of Microeconomics: Consumers, Producers, and the Efficiency of Markets

Consumer Surplus (CS)

• Definition: Monetary difference between consumer's willingness to pay (WTP) and the price paid.

• Demand curve reflects consumer's marginal willingness to pay.

• CS measures economic well-being of consumers.

Producer Surplus (PS)

• Definition: Difference between price received by sellers and their opportunity cost of production.

• PS measures benefit to sellers from production.

Welfare Economics

• Examines how resource allocation affects economic well-being of consumers and producers.

• Total Surplus (TS) = Consumer Surplus (CS) + Producer Surplus (PS).

Measuring Surpluses

• Individual CS is the area under the demand curve above the market price.

• Market CS is the total area below market demand and above the market price.

• Total PS is the area above the supply curve below the market price.

Market Efficiency

• Resources are allocated through interactions of buyers and sellers in a decentralized market.

• Market equilibrium maximizes total surplus when goods are produced by lowest-cost producers and consumed by those who value them highest.

Changes in Surplus

• Price changes affect CS and PS.

• Increase in price reduces CS due to fewer buyers able to participate and higher costs for remaining buyers.

• Decrease in price increases CS and allows more buyers to enter the market.

Key Concepts

• CS = WTP - Price

• PS = TR - VC (Total Revenue - Variable Cost)

• Total Surplus measures gains from trade in a market, highlighting overall societal welfare.

• Effective resource allocation leads to maximized total surplus, improving economic well-being.