Chapter 7 Reflections

Chapter seven: Consumers, Producers, and the Efficiency of Markets.

Efficiency from the perspective of an economist would be described as: an allocation of resources that maximizes the sum of consumer and producer surplus; because when total surplus is maximized, market allocations are most efficient.

I can't say that any concepts in this chapter were necessarily difficult, thanks to our textbook it made the theories understandable. But I did learn something new, and that is about consumer, producer and total surplus.
Consumer surplus gauges the benefit buyers receive from participating in the market. In mathematical terms, it is the value to buyers less the amount paid by buyers. For example: it's a hot summer day and my husband and I are both craving ice cream. He is willing to pay $4 for a cup, and I am willing to pay $3/cup. The ice cream comes out to $2.50/cup. Our total consumer surplus is $2 - the value of the ice cream to us less what we actually paid.
Producer surplus evaluates the benefit sellers receive. Producer surplus in mathematical terms is the amount received by sellers less the cost to sellers. Using the same scenario as above, if the cost of to the seller of selling each cup of ice cream is only $1, the seller's surplus is $1.50.
By adding both the consumer and producer surpluses, we arrive at total surplus.
If the price of a product is lower than market price the consumer surplus increases, but at the expense of producer surplus (if all product were purchased). But surpluses or shortages in the marketplace will result in a reduction of the total surplus to consumers and producers. Thus, it is safe to say that total surplus is maximized when the market price is in equilibrium (achieving efficiency!).

And with the exceptions of market failures, I agree with most economists in the theory that a free market is most efficient and will produce the price and quantity of goods that maximizes the sum of total surplus.

This chapter has definitely got me thinking about what value I place on the things I buy. It would be interesting to take a month and track all purchases, recording the amount of surplus (or by which amount things were forgone because the price was too high) and see the total personal amount of surplus at the end of the month!

That's all for now...
Ciao!