all right welcome back so now we're actually going to talk about demand supply and efficiency now that we have all the information about pizza out of the way so we've already defined efficiency multiple ways and we're just going to find a new way to define efficiency uh to think about okay efficiency we're not redefining it we're seeing a new way to think about it and our first way to measure it okay so again economist describes something as efficient when the pie is maximized and another way to think about the pie being maximized is there's no way to help one person without hurting another person okay so that is the pie being maximized efficiency in a supply and demand mall should be thought of this way that all possible gains from trade are maximized so when we look at these markets we want to think that this market has produced as much happiness as possible and we're going to see is that's not always the case and again we'll show you what it means um and so we're to show graphically we'll have to introduce the concept economic surplus okay so here's the concept of economic surplus the first thing we're going to talk about is consumer surplus sorry i wanted this demand curve oh that uh those animations did not go in the order they were supposed to go that's okay that's not that important demand and the demand curve measure a consumer's willingness to pay for a greater service so remember what the demand curve says demand curve says this is how much how many people are willing to purchase something at a given price so this is my market for tablets and this is actually an example from the book i just changed the numbers um to because i like this i wanted a graph that was a little easier to read so if you if you're looking at the book and think this is the same example why is the price different i just wanted an easier to read graph okay so i talked about this in one of my earlier lecture videos that if someone is in my classroom holding a 4.50 um frappuccino from starbucks i may have never met that person before it could be the first day of class but i already know something about him i know he valued that frappuccino at at least four dollars and fifty cents he willingly traded four dollars and fifty cents of his money for that frappuccino so to him when he sees that frappuccino he's something sees something whose value is greater than 4.50 or at least as great as right that's an important concept here to us we're going to call that the willingness to pay for a good so when i look at this market for tablets we see that we have our equilibrium here and we're going to focus on this equilibrium price of 250 that means that's the price you need to pay to buy a tablet but look at this point up here this point tells me that had the price been four hundred dollars they still could have sold two thousand tablets meaning there was sufficient demand for 2 000 tablets at a price of 400 so there are 2 000 people out there who are willing to pay at least 400 for a tablet okay does that make sense there are 2 000 people who are willing to pay 400 for a tablet so for those 2 000 people when they look at the tablet they see something worth 400 or more okay that doesn't mean that's what they have to pay because the price of a tablet is 250 that's what equilibrium says so consider that person who was willing to pay 400 for the tablet the tablet to them is worth 400 do they pay 400 no they pay the equilibrium price they pay 250 so let's think about that person let's think about the mentality of that person when they leave the store with their tablet how do they feel about that they feel happy about their purchase they like that purchase they feel good about it because when they walked into that store they had 250 in their hand okay they handed it to somebody and that person gave them a tablet to them which is worth four hundred dollars so in reality they just bought something right but in their hearts and in their minds they've just improved themselves by a total of 150 they improved their economic situation by 150 because again they gave something worth 250 money and got back something worth 400. okay so what you realize is a lot of this depends on the sort of subjective placing of placing value on items but you have to realize we all do that every single day of our lives any time we buy something we have placed a value on it and you know how i know that because you bought it right if i don't paste a value of 250 on this tablet i'm not going to buy it if i think it's worth 200 i'm not going to buy and that doesn't mean i'm saying oh this thing's overpriced it's worth 200 i'll buy it anyway i did not think it's worth 200 i wanted to pay 200 i was hoping to pay less money but i clearly placed a value of it over 250 because i voluntarily traded 250 for this tablet that trade was worth it to me okay sorry my throw is getting a little scratchy so um for those pers people who do push put a value of 400 on it we're gonna say they get 150 worth of consumer surplus okay so consumer surplus is the excess benefit of a market purchase remember in economics we assume any decision has a cost and benefit associated with it sometimes we get really complicated with thinking about the costs and benefits like we did when we're trying to think about the cost dependence to go into college but when we think about buying something we usually just focus on what's the cost 250 dollars what's the benefit a new tablet and that new tablet to me as someone who's willing to pay 400 is 400 so that 150 of consumer surplus that's the excess benefit so the benefits let me just write that out here so my benefit is 400 that's how much that's the price i value that tablet i had to pay 250 so that means my excess benefit or consumer surplus is a hundred and fifty dollars okay and so graphically we're going to say the consumer surplus for this person who's willing to play 400 is the difference between their spot on the demand curve and the price they actually pay okay so let's think about somebody else what about the person who was willing to pay 300 they valued at 300 they only have to pay 250 are they happy yes are they as happy as that other guy who was willing to pay 400 no their consumer surplus is 50 so graphically this is their surplus so this is the person willing to pay 400 that's his surplus this is the person willing to pay 300 that's her surplus so if i combine those two that's the surplus for these two people those people combined have 150 plus 50 200 worth of consumer surplus so as you can imagine i can keep going here i don't have to stop at two people okay the consumer surplus for a person who is willing to pay 450 would look like this the consumer surplus for someone who's willing to pay 375 would look like this what if you're willing to pay 255 dollars for that tablet do you still have consumer surplus yeah five dollars this is your surplus right here and so i can keep going and i can keep going and i hope you can see what happens if i take every single person in the market every single person who bought a tablet and i combine all of their consumer surplus together i get this triangle so that is graphically how we're going to describe consumer surplus it is the area below the demand curve but above the price okay for everybody who buys a tablet so everybody who buys a tablet which you know we can see the quantity of tablet sold is right here so all 5 000 people who buy a tablet or 5 000 tablets sell whole sold for every tablet sold there is some consumer surplus and this graphically shows it because this adds up the difference between the willingness to pay and the cost actually paid okay producer surplus is the opposite side actually you know i take it back i'm making new videos for producer surplus so you can take a little break now