
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