The document discusses consumer surplus, producer surplus, and efficiency. Consumer surplus is the difference between the maximum price consumers are willing to pay and the actual price paid, represented as the area under the demand curve and above the market price. Producer surplus is the difference between the actual price received and the minimum price producers are willing to accept, shown as the area above the supply curve and below the market price. A market is efficient when consumer and producer surplus are maximized at the equilibrium quantity, where marginal benefit equals marginal cost. Deadweight loss occurs when surplus is not maximized due to over or under-production, resulting in an inefficient allocation of resources.

1. Consumer and
Producer Surplus
Efficiency and
Deadweight Loss

2. 2
Consumer Surplus
 The difference between the maximum price consumers are willing to pay for
a product and the actual price.
 The surplus, measurable in dollar terms, reflects the extra utility gained from
paying a lower price than what is required to obtain the good.
 Consumer surplus can be measured by calculating the difference between
the maximum willingness to pay and the actual price for each
consumer, and then summing those differences.
 Or consumer surplus is shown graphically as the area under the demand
curve and above the equilibrium price.
 Consumer surplus and price are inversely related – all else equal, a higher
price reduces consumer surplus.

3. 3
Consumer Surplus
 The difference between the maximum price consumers are willing to pay for
a product and the actual price.
 The surplus, measurable in dollar terms, reflects the extra utility gained from
paying a lower price than what is required to obtain the good.
 Consumer surplus can be measured by calculating the difference between
the maximum willingness to pay and the actual price for each
consumer, and then summing those differences.
 Or consumer surplus is shown graphically as the area under the demand
curve and above the equilibrium price.
 Consumer surplus and price are inversely related – all else equal, a higher
price reduces consumer surplus.
In a competitive market, the
actual price will be the
equilibrium or market price.
The maximum willingness to pay is the
consumer’s marginal benefit for the
good measurable in dollar terms.

4. 4
Consumer Surplus
P
Q
S
D
Market
Price
Consumer Surplus is
the area under the demand
curve and above the market
price.

5. 5
Producer Surplus
 The difference between the actual price producers receive and the
minimum acceptable price.
 Producer surplus can be measured by calculating the difference
between the minimum acceptable price and the actual price for each
unit sold, and then summing those differences.
 Producer surplus is shown graphically as the area above the supply
curve and below the equilibrium price.
 Producer surplus and price are directly related – all else equal, a
higher price increases producer surplus.

6. 6
Producer Surplus
P
Q
S
D
Market
Price
Producer surplus is
the area under the market
price and above the price
necessary for supply.

7. 7
Efficiency
 Markets are allocatively efficient (i.e., the allocation of
resources to the quantity most desired) when consumer
and producer surplus are at a maximum.
 Consumers receive utility up to their maximum willingness to
pay, but only have to pay the equilibrium price.
 Producers receive the equilibrium price for each unit, but it only
costs the minimum acceptable price to produce.
 Allocative efficiency occurs at quantity levels where three
conditions exist:
 MB = MC
 Maximum willingness to pay = minimum acceptable price.
 Combined consumer and producer surplus is at a maximum.

8. 8
Maximum benefit to society occurs when price and
quantity are at the equilibrium point.
P
Q
S
D
Market
Price
Equilibrium quantity
Consumer surplus and
Producer surplus are
maximized.

9. 9
Inefficiency or Deadweight Loss
 Underproduction reduces both consumer and producer surplus, and
efficiency is lost because both buyers and sellers would be willing to
exchange a higher quantity.
 Overproduction causes inefficiency because past the equilibrium
quantity, it costs society more to produce the good than it is worth to
the consumer in terms of willingness to pay.
 A deadweight loss occurs when the combined consumer and
producer surplus is not maximized. This occurs when something
such as a price control causes either over-production or under-
production of a good or service.

10. 10
An imperfect competitor produces at a price higher and at a
quantity less than pure competition causing a loss of
efficiency.
P
Q
MC
D
MR
Producer
surplus
Consumer
surplus
Surplus is not
Maximized:
Loss of efficiency

11. 11
Remember:
 Consumer surplus is the difference between the maximum price
consumers are willing to pay for a product and the actual price.
 Producer surplus is the difference between the actual price
producers receive and the minimum acceptable price.
 Markets are efficient when the consumer and producer surpluses
are at a maximum.
 A deadweight loss occurs whenever there is over-production or
under-production of a good or service.