ECON 103 Lecture Notes - Economic Surplus, Marginal Utility, Deadweight Loss

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Published on 19 Apr 2013
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Fraser International College
ECON1034 “Principles of Microeconomics”
Chapter 5: Efficiency and Equity
THE KEY CONCEPTS in this chapter:
-marginal social benefit
-marginal social cost
-consumer surplus (individual and market)
-producer surplus (individual and market)
-deadweight loss
Recall the scarcity problem:
1.Scarcity arises when resources are not efficient to meet the demand of the society.
2.A good which is a scarce has a value.
3.if a scarce good is given in free people will run out of it.
How do markets answer the scarcity problem?
1.What to produce?
Refers to what type of goods and services to produce which have demand in the market and or
2.How to produce?
Make choices about what resources to use, in what quantities, efficiently or not.
3.For whom to produce?
Refers to how the total output is to be divided among different consumers.
Solving the scarcity problem through markets is just one of many possible ways.
Do markets do a good job? Do markets solve the scarcity problem in the social interest?
Sometimes don’t as the market only produce those goods for what the people are willing and
able to pay or through Price Mechanism ,So the persons who are not able to pay for the good are
excluded so thus it does not count into Social Interest.
The markets would solve the scarcity problem in the social interest if the market outcome
-efficient, and
Resources and goods are allocated efficiently if
No one can be made better off without making someone else worse off.
Efficiency :MSC=MSB
In other words, efficient allocation is achieved when marginal benefit is equal to marginal
If we can show that at the market equilibrium marginal benefit is equal to marginal
cost, then we will show that the market is efficient.
Recall: marginal benefit is
Is the additional benefit of doing a activity
Recall: relationship between marginal benefit and individual demand
Individual demand and market demand
Is the demand of a persosn while Market demand is the demad of society as a whole.
The market demad is the horizontal sum of the individual demad curves and is formed by adding
the quantities demaded by all the buyers.
Market demand is the marginal social benefit.
As the individual demad is marginal benefit so the Market demad is social benefit.
Consumer surplus
-individual consumer surplus
- Consumer Surplus is a measure of the welfare that people gain from consumption of
goods and services.
- Consumer surplus is the difference between the price he is willing to pay and what he
actually pays.
-consumer surplus for the market
It is the sum of all individual consumers.