![]() ![]() The amount that individuals would have been willing to pay, minus the amount that they actually paid, is called consumer surplus. Remember, the demand curve traces consumers’ willingness to pay for different quantities. Those consumers who would have been willing to pay $90 for a tablet (based on the utility they expect to receive from it) were able to pay the equilibrium price of $80, clearly received a benefit beyond what they had to pay. ![]() This portion of the demand curve shows that at least some demanders would have been willing to pay more than $80 for a tablet.įor example, point (J) shows that if the price were $90, 20 million tablets would be sold. To see the benefits to consumers, look at the segment of the demand curve above the equilibrium point and to the left. The equilibrium price is $80 and the equilibrium quantity is 28 million. Consumer Surplus, Producer Surplus, Social SurplusĬonsider a market for tablet computers, as Figure 3.9 shows. In 1890, the famous economist Alfred Marshall wrote that asking whether supply or demand determined a price was like arguing “whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper.” The answer is that both blades of the demand and supply scissors are always involved. The demand and supply model emphasizes that prices are not only set by demand or supply, but also by the interaction between the two. In other words, the optimal amount of each good and service is produced and consumed. Conversely, if a situation is inefficient, it becomes possible to benefit at least one party without imposing costs on others.Įfficiency in the demand and supply model has the same basic meaning: The economy is getting as much benefit as possible from its scarce resources and all the possible gains from trade have been achieved. One typical way that economists define efficiency is when it is impossible to improve the situation of one party without imposing a cost on another. The familiar demand and supply diagram holds within it the concept of economic efficiency. ![]()
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