4.5 End-of-Chapter Material - savingstudentsmoney.org

Figure 5.4 The Seller’s Valuation
The seller follows the decision rule: “Sell if the price is greater than the valuation.”
The buyer’s valuation in our example is larger than the seller’s valuation. This means it is possible to make both the buyer and the seller better off. The
mere fact of transferring a good from someone who values it less to someone who values it more is an act that creates value in the economy. We say
that there are gains from trade available here.
Toolkit: Section 17.10 "Buyer Surplus and Seller Surplus"
Total surplus is a measure of the gains from trade. In a single transaction,
total surplus = buyer’s valuation − seller’s valuation.
In this example, therefore, the total surplus is $1,000. This is the value created in the economy by the simple fact of transferring the car from a seller
who values it less to a buyer who values it more. Figure 5.5 "Buyer and Seller Valuations" shows this graphically by combining the unit demand curve
and the unit supply curve.