#cfa #cfa-level-1 #economics #microeconomics #reading-13-demand-and-supply-analysis-introduction #study-session-4
In the previous sections, we have seen that consumers and producers both receive “a bargain” when they are allowed to engage in a mutually beneficial, voluntary exchange with one another. For every unit up to the equilibrium unit traded, buyers would have been willing to pay more than they actually had to pay. Additionally, for every one of those units, sellers would have been willing to sell it for less than they actually received. The total value to buyers was greater than the total variable cost to sellers. The difference between those two values is called total surplus, and it is made up of the sum of consumer surplus and producer surplus. Note that the way the total surplus is divided between consumers and producers depends on the steepness of the demand and supply curves. If the supply curve is steeper than the demand curve, more of the surplus is being captured by producers. If the demand curve is steeper, consumers capture more of the surplus.
In a fundamental sense, total surplus is a measure of society’s gain from the voluntary exchange of goods and services. Whenever total surplus increases, society gains. An important result of market equilibrium is that total surplus is maximized at the equilibrium price and quantity. Exhibit 14 combines the supply curve and the demand curve to show market equilibrium and total surplus, represented as the area of the shaded triangle. The area of that triangle is the difference between the trapezoid of total value to society’s buyers and the trapezoid of total resource cost to society’s sellers. If price measures dollars (or euros) per unit, and quantity measures units per month, then the measure of total surplus is dollars (euros) per month. It is the “bargain” that buyers and sellers together experience when they voluntarily trade the good in a market. If the market ceased to exist, that would be the monetary value of the loss to society.Exhibit 14. Total Surplus as the Area beneath the Demand Curve and above the Supply Curve