Chapter 7

Chapter 7 is titled “consumers, producers, and the efficiency of markets” and focuses on welfare economics, how the allocation of resources affects economic well-being. This is described by introducing the benefits for buyers and sellers, called consumer surplus and producer surplus, and leads to the analysis that the equilibrium of supply and demand maximizes the total benefits received by all buyers and sellers. If the “allocation of resources maximizes total surplus” the allocation is said to be efficient from an economists view. The chapter continues to weigh the differences between efficiency and equality.

Producer and consumer surplus are important in determining market equilibrium because the equilibrium price and quantity are determined by benefits received by buyers and sellers in the market. Consumer surplus is the amount a buyer is willing to pay minus the amount they paid and producer surplus is the amount a seller is paid minus their costs. Also, as seen on a graph, the total surplus is the area between the supply and demand curve up to the equilibrium quantity. Consumer surplus is the area above the equilibrium price and below the demand curve and producer surplus is the area below the equilibrium price and above the supply curve. Therefore, if either of this were to adjust at all, due to a shift in the supply or demand curve, or a change in the equilibrium price or quantity, there would be a direct change to the surplus.

Market efficiency should not always be the goal of policy setters because there are trade offs between efficiency and equality. While being efficient maximizes resources which is important because it creates the most amount of output, limits waste, and grows the economy, equality distributes economic prosperity among all members so that everyone shares well-being, which also makes the economy better off. There are benefits to both and there is definitely a trade off because there are times which maximizing output is most important and there are times when giving some benefits to everyone and making society as a whole better off is more important. This is based on personal belief and specific situations where some people think being efficient is most important and some people think being equal is most important.