Overview
This lecture introduces the concepts of efficiency and economic surplus in the context of supply and demand, focusing specifically on consumer surplus.
Efficiency in Economics
- Efficiency means maximizing the "pie" so no one can be helped without hurting someone else.
- In markets, efficiency is achieved when all possible gains from trade are maximized.
- Economists assess efficiency by determining if the market produces maximum happiness or benefit.
Economic Surplus
- Economic surplus is a key tool to measure efficiency in supply and demand models.
- There are two main types of surplus: consumer surplus and producer surplus (producer surplus will be covered in a later lecture).
Consumer Surplus
- Consumer surplus is the extra benefit received when consumers pay less than what they are willing to pay for a good.
- The demand curve shows consumers' willingness to pay at different prices.
- Equilibrium price is where supply and demand intersect, setting the market price.
- If someone is willing to pay $400 for a tablet but pays only $250 (the market price), their consumer surplus is $150.
- Anyone buying the product values it at least as much as the price they pay, otherwise they wouldn't purchase it.
- Consumer surplus varies by individual, depending on how much over the market price they value the product.
- Graphically, consumer surplus is the area below the demand curve and above the market price, for all units sold.
Key Terms & Definitions
- Efficiency — A market state where no one can be made better off without making someone else worse off.
- Economic Surplus — The sum of benefits to all participants in a market.
- Consumer Surplus — The difference between a consumer's willingness to pay and the actual price paid.
Action Items / Next Steps
- Review notes on consumer surplus.
- Await upcoming lecture or video on producer surplus.