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1.Definition – the difference between the maximum price a consumer is (or consumers are) willing to pay for a product and the actual price.

2.The surplus, measurable in dollar terms, reflects the extra utility gained from paying a lower price than what is required to obtain the good.

3.Consumer surplus can be measured by calculating the difference between the maximum willingness to pay and the actual price for each consumer, and then summing those differences.

4.Consumer surplus is measured and represented graphically by the area under the demand curve and above the equilibrium price.  (Figure 6.5)

5.Consumer surplus and price are inversely related – all else equal, a higher price reduces consumer surplus.

B.Producer Surplus

1.Definition – the difference between the actual price a producer receives (or producers receive) and the minimum acceptable price.

2.Producer surplus can be measured by calculating the difference between the minimum acceptable price and the actual price for each unit sold, and then summing those differences.

3.Producer surplus is measured and represented graphically by the area above the supply curve and below the equilibrium price. (Figure 6.6)

4.Producer surplus and price are directly related – all else equal, a higher price increases producer surplus.

V.Efficiency Revisited and Efficiency Losses

A.Efficiency is attained at equilibrium, where the combined consumer and producer surplus is maximized.  (Figure 6.7)

1.Consumers receive utility up to their maximum willingness to pay, but only have to pay the equilibrium price.  

2.Producers receive the equilibrium price for each unit, but it only costs the minimum acceptable price to produce.

3.Allocative efficiency occurs at quantity levels where three conditions exist:

a.MB = MC

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