The document discusses consumer surplus, producer surplus, and how free markets can allocate resources efficiently. It defines consumer surplus as the difference between what buyers are willing to pay and what they actually pay, and producer surplus as the difference between what sellers receive and their costs. The market equilibrium maximizes the total surplus, or sum of consumer and producer surplus, representing an efficient allocation. However, market power and externalities can cause markets to fail to allocate resources efficiently.

1. 3 SUPPLY AND DEMAND II: MARKETS AND WELFARE

2. 7 Consumers, Producers, and the Efficiency of Markets

9. Table 1 Four Possible Buyers’ Willingness to Pay Copyright©2004 South-Western

11. The Demand Schedule and the Demand Curve

12. Figure 1 The Demand Schedule and the Demand Curve Copyright©2003 Southwestern/Thomson Learning Price of Album 0 Quantity of Albums 1 2 3 4 Demand $100 John ’ s willingness to pay 80 Paul ’ s willingness to pay 70 George ’ s willingness to pay 50 Ringo ’ s willingness to pay

13. Figure 2 Measuring Consumer Surplus with the Demand Curve Copyright©2003 Southwestern/Thomson Learning (a) Price = $80 Price of Album 50 70 80 0 $100 1 2 3 4 Quantity of Albums Demand John ’ s consumer surplus ($20)

14. Figure 2 Measuring Consumer Surplus with the Demand Curve Copyright©2003 Southwestern/Thomson Learning (b) Price = $70 Price of Album 50 70 80 0 $100 1 2 3 4 Quantity of Albums Demand Total consumer surplus ($40) John ’ s consumer surplus ($30) Paul ’ s consumer surplus ($10)

16. Figure 3 How the Price Affects Consumer Surplus Copyright©2003 Southwestern/Thomson Learning Quantity (a) Consumer Surplus at Price P Price 0 Consumer surplus Demand P 1 Q 1 B A C

17. Figure 3 How the Price Affects Consumer Surplus Copyright©2003 Southwestern/Thomson Learning Quantity (b) Consumer Surplus at Price P Price 0 Initial consumer surplus Demand A B C D E F P 1 Q 1 P 2 Q 2 Consumer surplus to new consumers Additional consumer surplus to initial consumers

20. Table 2 The Costs of Four Possible Sellers Copyright©2004 South-Western

22. The Supply Schedule and the Supply Curve

23. Figure 4 The Supply Schedule and the Supply Curve

25. Figure 5 Measuring Producer Surplus with the Supply Curve Copyright©2003 Southwestern/Thomson Learning Quantity of Houses Painted Price of House Painting 500 800 $900 0 600 1 2 3 4 (a) Price = $600 Supply Grandma ’ s producer surplus ($100)

26. Figure 5 Measuring Producer Surplus with the Supply Curve Copyright©2003 Southwestern/Thomson Learning Quantity of Houses Painted Price of House Painting 500 800 $900 0 600 1 2 3 4 (b) Price = $800 Georgia ’ s producer surplus ($200) Total producer surplus ($500) Grandma ’ s producer surplus ($300) Supply

27. Figure 6 How the Price Affects Producer Surplus Copyright©2003 Southwestern/Thomson Learning Quantity (a) Producer Surplus at Price P Price 0 Producer surplus Supply B A C Q 1 P 1

28. Figure 6 How the Price Affects Producer Surplus Copyright©2003 Southwestern/Thomson Learning Quantity (b) Producer Surplus at Price P Price 0 P 1 B C Supply A Initial producer surplus Q 1 P 2 Q 2 Producer surplus to new producers Additional producer surplus to initial producers D E F

34. Figure 7 Consumer and Producer Surplus in the Market Equilibrium Copyright©2003 Southwestern/Thomson Learning Price 0 Quantity Producer surplus Consumer surplus Equilibrium price Equilibrium quantity Supply Demand A C B D E

36. Figure 8 The Efficiency of the Equilibrium Quantity Copyright©2003 Southwestern/Thomson Learning Quantity Price 0 Supply Demand Cost to sellers Cost to sellers Value to buyers Value to buyers Value to buyers is greater than cost to sellers. Value to buyers is less than cost to sellers. Equilibrium quantity