[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

CONSUMER AND PRODUCER
SURPLUS
To understand why competitive markets are efficient, we need to
measure the benefit that consumers gain from buying goods in such
a market, as well as measure the benefits that firms gain from selling
in it. We will then show that equilibrium in the competitive
market leads to the greatest possible total gain for consumers
and firms.
To evaluate the outcome in a competitive market, we can make
use of Figure 10.1, which shows the market demand and supply
curves for a market in equilibrium at a quantity Q c and a price p c . Can
we measure the benefits that accrue to consumers and firms from
participating in this market? From Chapter 5, we know that the gain
to consumers is measured by consumer surplus. The consumers
who purchase the good will do so only if their willingness to pay is
greater than the market price. The magnitude of the net benefit that
they receive from, say, the nth unit of the good they purchase is the
difference between what they have to pay for that good—the market
price—and what they were willing to pay for that good, as reflected
in the demand curve. Accordingly, the area shaded in blue measures
the total consumer surplus.
Firms also gain from participating in the market. As we learned
in Chapter 7, the market supply curve reflects the marginal costs
of producing the good. At the equilibrium quantity, Q c , the marginal
cost of producing the last unit of output is p c , the equilibrium price.
Just as the demand curve shows consumers’ willingness to pay, so
the supply curve shows firms’ willingness to produce; if the market
price were p 1 , firms would be willing to produce only the quantity Q 1 .
The supply curve has a positive slope, reflecting the fact that marginal
cost rises as output increases. At an output of Q 1 , the marginal
cost of production is equal to p 1 , so the marginal cost of producing Q 1 is less than
the competitive equilibrium price p c . Since the firm is able to sell all it produces at
the competitive market price p c , it sells all but the last (marginal) unit for more than
its marginal cost production. The magnitude of the profit, the net benefit, that firms
receive from selling, say, the nth unit of the good is the difference between what they
receive, the market price, and the price at which they would have been willing to
produce the good, the marginal cost. The total gain to firms, called producer surplus,
is the difference between the supply curve and the market price. The producer
surplus is the green area in the figure.
We measure the total gain to both consumers and producers by adding together
consumer surplus and producer surplus. We can now state an important result: The
equilibrium price and quantity in a competitive market lead to the highest possible level
of total surplus. At quantities such as Q 1 , which are below the market equilibrium
quantity Q c , consumers are willing to pay p 2 while firms are willing to sell at p 1 . The
value to consumers exceeds the cost to firms of producing an extra unit. Total
surplus could be increased if the quantity were increased. At output levels greater
PRICE (p)
p 2
p c
p 1
Figure 10.1
Q 1
Consumer
surplus
Producer
surplus
Q c
QUANTITY (Q )
THE COMPETITIVE MARKET EQUILIBRIUM
MAXIMIZES CONSUMER AND PRODUCER
SURPLUS
Supply
curve
Demand
curve
When a competitive market is in equilibrium at the price p c
and quantity Q c , at which demand and supply are equal, the
sum of consumer surplus and producer surplus reaches its
highest possible value. Consumer surplus is the blue area
between the demand curve, showing willingness to pay,
and the market price. Producer surplus is the green area
between the supply curve (showing marginal cost) and the
market price. If quantity is Q 1 , firms are willing to supply an
additional unit at a price p 1 , while consumers are willing to
pay p 2 . The value to consumers exceeds the cost to producers,
and total surplus can be increased if production
expands. At quantities above Q c , surplus can be increased
by reducing output. At the market equilibrium, p c and Q c ,
the sum of consumer and producer surplus is maximized.
COMPETITIVE MARKETS AND ECONOMIC EFFICIENCY ∂ 217