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Total Welfare

Economics (Year 11) - Market Efficiency

Carys Brown

How does a market create welfare?

  • In most competitive markets everybody ‘wins’ as both buyers and sellers gain from trading in the market – if trading was not worth their while, buyers and sellers would simply opt out of the trade

  • The total welfare or community surplus created in a market is the sum of consumer surplus and producer surplus

What is consumer surplus?

  • As long as consumers act rationally, the value or marginal benefit to them of the product they have bought will be greater than the price they have paid for the product

  • Everybody that buys something in a market gets a bonus because of the benefit or pleasure they receive than the price they have to pay – this bonus is called consumer surplus and it contributes to their total welfare

What is producer surplus?

  • As long as producers act rationally, the market price they receive from supplying a product to a market will exceed the cost of producing it

  • Producers won’t sell products where the marginal cost of production is more than the revenue that they receive for selling them – if they did, they would not make a profit and go out of business

Why does a market maximise revenue?

  • Consumers and producers simply opt out of a market when they don’t get their bonus – this opting out process occurs when market equilibrium quantity is reached

  • If trade continued beyond this point, consumers and producers would lose some of their consumer and producer surplus

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