Chapter 7 Summary

Chapter 7 began to discuss the idea of welfare economics--that is; the study of how the allocation of resources affects the well-being of people within the economy and therefore the economy as a whole. It began by introducing the idea of consumer surplus--that is; how much someone is willing to pay for an item minus how much they actually pay for it. In general, this is a reflection of economic well-being. Consumer surplus is a measure of how much extra value consumers receive for a good and can easily be measured by finding the area under the demand curve and above the market price. Obviously, the lower the price, the greater the consumer surplus. Producer surplus is defined similarly--the amount producers receive minus their cost (which is a measure of willingness to sell and should be considered to include opportunity cost as well as monetary costs). Like consumer surplus, it is a measure of the benefit paid to sellers and is measured by the area above the supply curve and below the market price. Obviously, a higher price raises producer surplus. The sum of consumer and producer surplus, called total surplus, is a good measure of society's total economic well-being. If an outcome maximizes total surplus, it is efficient. In addition to caring about efficiency, one might also care about equity--or how resources are divided up. At equilibrium, markets are most efficient, however, not necessarily the most equitable as that depends on values.