Ch. 6 Sec. 3 - chapter 6 > Consumer and Producer Surplus...

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>> Consumer and Producer Surplus Section 3: Consumer Surplus, Producer Surplus, and the Gains from Trade chapter 6 One of the nine core principles of economics we introduced in Chapter 1 is that mar- kets are a remarkably effective way to organize economic activity: they generally make society as well off as possible given the available resources. The concepts of consumer surplus and producer surplus can help us deepen our understanding of why this is so. The Gains from Trade Let’s go back to the market in used textbooks but now consider a much bigger market— say, one at a large state university—where there are many potential buyers and sellers. Let’s line up incoming students—who are potential buyers of the book—in order of their willingness to pay, so that the entering student with the highest willingness to pay is potential buyer number 1, the student with the next highest willingness to pay is num- ber 2, and so on. Then we can use their willingness to pay to derive a demand curve like the one in Figure 6-10. Similarly, we can line up outgoing students, who are potential sellers of the book, in order of their cost, starting with the student with the lowest cost,
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then the student with the next lowest cost, and so on, to derive a supply curve like the one shown in the same figure. As we have drawn the curves, the market reaches equilibrium at a price of $30 per book, and 1,000 books are bought and sold at that price. The two shaded triangles show the consumer surplus (blue) and the producer surplus (red) generated by this 2 CHAPTER 6 SECTION 3: CONSUMER SURPLUS, PRODUCER SURPLUS, AND THE GAINS FROM TRADE Figure 6-10 1,000 $30 Quantity of books 0 S E D Price of book Consumer surplus Producer surplus Equilibrium price Equilibrium quantity Total Surplus In the market for used textbooks, the equilibrium price is $30 and the equilib- rium quantity is 1,000 books. Consumer surplus is given by the blue area, the area below the demand curve but above the market price. Producer surplus is given by the red area, the area above the supply curve but below the market price. The sum of the blue and the red areas is total surplus, the total benefit to society from the production and con- sumption of the good.
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market. The sum of consumer and producer surplus is known as the total surplus generated in a market. The striking thing about this picture is that both consumers and producers gain— that is, both consumers and producers are better off because there is a market in this good. But this should come as no surprise—it illustrates another core principle of eco- nomics: there are gains from trade . These gains from trade are the reason everyone is better off participating in a market economy than they would be if each individual tried to be self-sufficient. But are we as well off as we could be? This brings us to the question of the effi-
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Ch. 6 Sec. 3 - chapter 6 > Consumer and Producer Surplus...

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