Consumer Surplus:
The benefit surplus received by a consumer or consumers in a market. The difference between the maximum price a consumer is willing to pay for a product and the actual price.

• Consumers gain a greater total utility in dollar terms (total satisfaction)

*Utility Surplus arises because consumers pay the equilibrium price when they are willing to pay more

*Before equilibrium, any additional product purchased would increase total utility (as the utility is greater than the cost)

*Total consumer surplus=sum of individual consumer surplus

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Producer Surplus:

• The benefit surplus received by producers in markets. The difference between the actual price a producer receives and the minimum acceptable price.

There is a direct relationship between equilibrium price and the amount of producer surplus.











Efficiency Revisited:

• Implications on Efficiency: market equilibrium price and quantity represent two kinds of efficiency.

• Productive efficiency: competition forces producers to use the best techniques and combinations of resources to produce their output. Firms that are productively inefficient are competed out of business, because they cannot sell for the market price.
• Allocative efficiency: the correct quantity of output is produced relative to other goods and services. Just the right amount of resources are being used to make a good or service when market is in equilibrium.

• Points on demand curve = marginal beneft (MB)
• Points on supply curve = marginal cost (MC)
• Ceteris parabus, competitive markets produce equilibrium prices and quantities that maximize the sume of consumer + producer surplus

• Allocative efficency occurs at quantity levels in which:

1. MB = MC
2. Maximum willingness to pay = minimum acceptable price
3. Combined consumer + producer surplus is at a maximum

Efficiency Losses (or Deadweight Loss): Reductions of combined consumer and producer surplus

• Associated with underproduction or overproduction of a product creates an efficiency loss called deadweight loss.
• Under most conditions, however, the competitive market makes sure that the "right amount" of a particular good gets produced.
• Deadweight losses can occur when price ceilings or price floors are imposed on the market. These price ceilings or price floors may appear to protect consumers or producers, respectively, but they result in a loss of either consumer or producer surplus, leading to deadweight losses and lack of efficiency in the market. DWL occurs because there is not an optimal and efficient use of all resources, thus the shaded area below is lost from total consumer and producer surplus.