1 CHAPTER 7: CONSUMERS, PRODUCERS AND MARKET EFFICIENCY In this chapter, we define consumer and producer surplus, and discuss how the perfectly competitive market provides the most efficient outcome possible in terms of maximizing total surplus. A) Consumer Surplus : It measures the well-being of consumers in the market. It is defined as the difference between the consumer’s willingness to pay for a product and the price s/he ends up paying, i.e. CR Surplus = (Willingness to pay – Price) . Graphically: Since consumers’ willingness to pay for a product are indicated by the demand function, the CR surplus is the area below the demand function and above the market price . (Examples, graphs and exercise #4 in your textbook covered in class) B) Producer Surplus : It measures the well-being of producers in the market. It is defined as the difference between the price that the producer charges for her/his product in the market and the incurred costs of production. That is: PR Surplus = (Price – Cost of Production). Graphically:
This is the end of the preview. Sign up
access the rest of the document.
This note was uploaded on 12/16/2010 for the course ECON 102 taught by Professor Clague during the Fall '08 term at San Diego State.