Consumer Surplus: The value consumers derive from purchases, calculated as the difference between what consumers are willing to pay and what they actually pay.
Producer Surplus: The value producers receive from sales, calculated as the difference between the price at which they sell their goods and the minimum price at which they are willing to sell.
Economic Surplus: The total benefit to society, calculated as the sum of consumer surplus and producer surplus.
Demand Curve: Represents consumers' willingness to pay for goods, indicating marginal benefit.
Supply Curve: Represents producers' willingness to sell goods, indicating marginal cost.
Valuable Transactions: Occur when the marginal benefit to consumers exceeds the marginal cost to producers.
If marginal benefit > marginal cost: Produce the goods (e.g., tacos).
Gains from trade arise when consumers perceive more value in the good than it costs to produce.
Equilibrium of supply and demand determines the quantity that maximizes economic surplus.
Efficiency occurs when resources are allocated to maximize economic surplus without wasteful transactions.
Overproduction: When marginal cost of producing an additional good exceeds its marginal benefit, leading to deadweight loss and wasted resources.
Underproduction: When potential transactions do not occur due to insufficient production, also resulting in deadweight loss by failing to maximize economic surplus.
Example of Individuals:
Marquise is willing to pay $6 for his first taco, $4 for the second, $1 for the third.
Nicole is willing to pay $5 for her first taco, $2 for the second, $0 for the third.
At an equilibrium price of $3:
Marquise buys two tacos, valuing them at $10 in total.
Nicole buys one taco, valuing it at $5.
Total value created: $15.
If Marquise’s second taco is taken away and given to Nicole:
Marquise would lose $4 in value.
Nicole would gain $2 in value.
Total value reduced to $13, indicating a loss in economic surplus.
If Nicole’s taco is taken and given to Marquise:
Marquise's total value becomes $11.
Total value is still less than $15 in the market, showcasing inefficiency when reallocating without considering individual valuations.
Individuals act on self-interest, making rational buying decisions based on comparing marginal benefit against marginal cost.
Market allocations effectively distribute goods to those with the highest marginal benefit and willingness to pay, maximizing economic surplus.