Unit 7: Consumers, Producers, and the Efficiency of Markets
Turning willingness to pay and willingness to sell into areas on a graph, and why the free-market quantity turns out to maximize the total.
4 topics · 13 questions
Each topic is a path, not a menu: work down it in order and every question builds on the one above. Click any of them to watch the answer draw itself.
Consumer Surplus
- How it worksHow does the area below the demand curve and above the price measure total consumer surplus in a market?
- Worked exampleFind the consumer surplus of a buyer willing to pay 80 dollars for a ticket that actually costs 50 dollars.
- Common mistakeWhy isn't consumer surplus just the money a buyer has left over after paying?
- Going furtherWhat happens to total consumer surplus in a market as the price falls further and further toward zero?
Your turn1 of 2
Find the consumer surplus of a buyer willing to pay 88 dollars for a ticket that actually costs 46 dollars.Producer Surplus
- How it worksHow does the area above the supply curve and below the price measure total producer surplus in a market?
- Worked exampleFind the producer surplus of a seller with a 30 dollar cost who sells for the market price of 50 dollars.
- Common mistakeWhy isn't producer surplus the same thing as a firm's accounting profit?
Your turn1 of 2
Find the producer surplus of a seller with a 37 dollar cost who sells for the market price of 69 dollars.Why the Market Equilibrium Maximizes Total Surplus
- How it worksHow does producing every unit where a buyer's value exceeds a seller's cost push total surplus to its maximum at equilibrium?
- Common mistakeWhy doesn't maximizing total surplus mean the market outcome is automatically fair to everyone?
- Going furtherWhat happens to total surplus if the quantity traded is pushed below or above the equilibrium quantity?
Your turn1 of 2
Producing 15 units less than the equilibrium quantity, where marginal benefit exceeds marginal cost by 8 dollars at the margin, creates how much lost total surplus, using one half times the gap times the quantity shortfall?Efficiency vs Equity, a First Look
- Common mistakeWhy isn't efficient the same thing as fair?
- How it worksHow do economists separate the size of the total pie, efficiency, from how the pie gets sliced, equity?
- Ties togetherHow does this efficiency-versus-equity split come back later when the course compares tax systems?
Your turn1 of 2
A market outcome is perfectly efficient, maximizing total surplus, but leaves one side of every deal, say the sellers, far better off than the buyers. How do efficiency and fairness relate in a case like this?