Consumers, Producers, and the Efficiency of Markets

Examines if equilibrium maximizes total welfare.
Market equilibrium reflects the way markets allocate scarce resources.
Welfare economics studies how the allocation of resources affects economic well-being.

Welfare Economics

Sub title
- Studies resource allocation impact on economic well-being.
- Equilibrium maximizes total welfare for consumers and producers.
- Maximum benefits for both consumers and producers.
Consumer Surplus
- Measures buyer’s willingness to pay for a good.
- Calculation: Buyer’s willingness to pay - Amount paid.
- Graphical Measurement: Area below demand curve and above price.
Producer Surplus
- Measures seller’s amount received minus cost.
- Calculation: Amount received by sellers - Cost to sellers.
- Graphical Measurement: Area below price and above supply curve.
Market Efficiency
- Sub title
  - Consumer and producer surplus address if free markets’ resource allocation is desirable.
- Efficiency Calculation
  - Consumer Surplus: Value to buyers - Amount paid by buyers.
  - Producer Surplus: Amount received by sellers - Cost to sellers.
  - Total Surplus: Consumer surplus + Producer surplus or Value to buyers - Cost to sellers.
- Efficiency Property
  - Resource allocation maximizes total surplus for society.
  - Social planner may also consider fairness in well-being distribution.
Market Efficiency Insights
- Allocates supply to buyers valuing goods most.
- Allocates demand to sellers producing at least cost.
- Produces goods quantity maximizing consumer and producer surplus.

Sub title
- Equilibrium is efficient resource allocation.
- Laissez-faire: Leaving market outcome as is.
Market Power
- Imperfect competition may lead to market power.
- Market Power: Ability to influence prices.
Externalities
- Occur when market outcome affects others.
- Welfare depends on more than just buyer and seller values.
- Inefficient equilibrium when externalities not considered.