Week 6 — Consumer & Producer Surplus & Market Efficiency

Why this matters

A used-gear shop owner and a city planner both ask how much a market's trades leave people ahead, and whether that split is fair.

In plain language

This week is about who gains when a market works, and by how much. When you buy something for less than it is worth to you, you come out ahead, and economists call that gain consumer surplus (the gap between what a buyer would pay and what the buyer does pay). When a seller gets more than the least they would accept, the seller comes out ahead too, and that gain is producer surplus (the gap between the price and the seller's cost). Add the two and you have total surplus (the whole gain from all the trades in a market). The big idea this week is that, in the model, a competitive market makes that total gain as large as it can be, and that how big the gain is and whether its split is fair are two different questions.

• Already covered: Weeks 3 and 4 built demand, supply, and equilibrium; Week 5 measured elasticity.
• This week: consumer, producer, and total surplus, efficiency, and equity.
• How they connect: the gains are read off Week 4's two curves.
• Where we're going next: Week 7 measures what price controls and taxes do to these gains.

Focus

Who gains from a market, by how much, and is the biggest total the same as fair?

By the end of this module, you should be able to:

• [ ] sum consumer, producer, and total surplus on a ladder
• [ ] compute both surplus triangles on a diagram
• [ ] explain why the equilibrium is efficient in the model
• [ ] tell a positive efficiency claim from a normative fairness claim

To-do

Plan your week

1. Read Chapter 6 (40–50 minutes), then the lecture and slides.
2. Work the tutorial (60–90 minutes) and practice set (15–25 minutes).
3. Do the Model Workshop (90 minutes), discussion, and assignment.
4. Take the quiz.

This week's checkpoint: compute buyers' and sellers' gains on a small ladder and say which claim is positive.

You've got this

Take it in order, and ask your instructor early.

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