Question

Define consumer and producer surplus and explain how they’re used to define market efficiency.

Answer 1

Consumer surplus is the benefit received by consumers when they is a difference between the willingness to pay and the price they actually end up paying for purchasing a particular quantity of a commodity.

Producer surplus is the benefit received by the producers when there is a difference between the market price received and the minimum price they are willing to accept for selling a particular quantity of a commodity.

Market efficiency is achieved when the sum of the consumer surplus and the producer surplus is maximized. This sum is also called the societal surplus or the economic surplus. When the resources are used with no efficiency loss then the economic surplus is said to be maximized. When this happens in the market is said to be efficient both from the standpoint of production and allocation of resources.