Unit 2
Microeconomics
Market and Allocative Efficiency
Real-World Issue #1: How do consumers and producers
make choices in trying to meet their economic objectives?
Learning Targets
➔ Learning Targets:
■ Explain the meaning of efficiency.
■ Explain the meaning of (i.) consumer surplus, (ii.) producer
surplus, and (iii.) social (community) surplus.
■ Illustrate (i.) consumer surplus, (ii.) producer surplus, and
(iii.) social (community) surplus.
■ Explain that at competitive market equilibrium allocative
efficiency is achieved.
Inquiry Question
➔ Inquiry Question:
■ What are the two types of efficiency?
■ How does the condition of market equilibrium and
maximum consumer and producer surplus determine the
optimal allocation of resources (most efficient outcome)?
WHAT IS EFFICIENCY?
Price of
Thingies
($)
❖
Efficiency: Refers to where a firm can
produce the same good, but with fewer
resources.
❖
Two types of efficiency:
S
a.
➔
Productive efficiency - Producing
goods by using the fewest possible
resources, which implies producing
at the lowest possible cost).
➔
Allocative efficiency - Producing the
optimal combination of goods from
society's point of view.
Pe
D
0
Qe
Quantity of
Thingies (Per
Week)
Diagram 1.1: Consumer surplus
WHAT IS CONSUMER SURPLUS?
Price of
Thingies
($)
❖
P3 $20
S
P2 $15
a.
P1 $10
D
0
5
10
Q2
Q1
Quantity of
Thingies (Per
Week)
Consumer surplus is maximized at
market equilibrium
Consumer Surplus (Benefit): Refers
to the difference between the price that
consumers pay for a good and the price
that they are willing to pay.
➔
Consumer surplus is shown by the
area under the demand curve and
above the equilibrium price.
➔
In the diagram, consumer surplus is
shown by the shaded area.
Diagram 1.1: Consumer surplus
WHAT IS CONSUMER SURPLUS?
Price of
Thingies
($)
❖
P3 $20
S
P2 $15
➔
a.
P1 $10
D
0
At the equilibrium point, there are some
consumers who are willing to pay a
higher price for their Thingies:
5
10
Q2
Q1
Quantity of
Thingies (Per
Week)
Consumer surplus is maximized at
market equilibrium
At a price of $15, there would still be
a quantity of 5 Thingies demanded..
❖
However, consumers do not have to pay
$15 they just have to pay the equilibrium
price.
❖
Thus, all consumers who were willing to
pay a higher price than $10 to purchase
Thingies received some benefit over and
above what they actually paid for the
good.
Diagram 1.2: Producer surplus
WHAT IS PRODUCER SURPLUS?
Price of
Thingies
($)
❖
S
a.
P1 $10
P2 $5
D
P3 $1
0
5
10
Q2
Q1
Quantity of
Thingies (Per
Week)
Producer surplus is maximized at
market equilibrium
Producer Surplus (Benefit): Refers
to the difference between the price
producers are willing to sell a good and
the price at which producers sell it.
➔
Producer surplus is shown by the
area above the supply curve and
under the equilibrium price.
➔
In the diagram, producer surplus
is shown by the shaded area.
Diagram 1.2: Producer surplus
WHAT IS PRODUCER SURPLUS?
Price of
Thingies
($)
❖
S
At the equilibrium point, some
production of Thingies would take place
at a price lower than $10:
➔
a.
P1 $10
❖
However, the producers do not have to
sell for $5; they can sell Thingies at the
equilibrium price.
❖
Thus, all producers who were willing to
accept a lower price than $10 to sell
Thingies received some benefit over and
above what they actually accepted for
selling the good.
P2 $5
D
P3 $1
0
5
10
Q2
Q1
Quantity of
Thingies (Per
Week)
Producer surplus is maximized at
market equilibrium
At a price of $5, there would be a
quantity of 5 Thingies supplied.
Diagram 1.3: Social (community) surplus
WHAT IS SOCIAL SURPLUS?
Price of
Thingies
($)
❖
S
Consumer
surplus
P1 $10
a.
Producer
surplus
Social surplus is
maximized;
Optimal level of
output (allocative
efficiency)
D
0
10
Q1
Quantity of
Thingies (Per
Week)
Social (community) surplus is
maximized at market equilibrium
Social Surplus: Refers to the total
benefit gained by society when the
market is at equilibrium (the sum of the
consumer surplus and producer surplus).
➔
At the equilibrium, where demand
is equal to supply, social surplus is
maximized…
➔
This is the optimum allocation of
resources from society’s point of
view (allocative efficiency).
Unit 2 Microeconomics
Five (5) Big Ideas from the Lesson: