Total surplus

Total surplus

· The total surplus generated in a market is the total net gain to consumers and producers from trading in the market It is the sum of the producer and the consumer surplus.

· The concepts of consumer surplus and producer surplus can help us understand why markets are and effective way to organize economic activity.

Consumer Surplus, producer surplus, and the Gains from trade

· The previous graph shows that both consumers and producers are better off because there is a market in this good, i.e there are gains from trade.

· These gains from trade are the reason everyone is better off participating in a market economy than they would be if each individual tried to be self-sufficient

· But are we as well off as we could be? This brings us to the question of the efficiency of markets.

The efficiency of markets: A preliminary view

· Claim: The maximum possible total surplus is achieved at market equilibrium

· The market equilibrium allocates the consumption of the good among potential consumers and sales of the good among potential sellers in a way that achieves the highest possible gain to society.

· By comparing the total surplus generated by the consumption and production choices, we can show that any change from the market equilibrium reduces total surplus.

⇐ Предыдущая 12