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