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Econ Videos 79 videos

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Econ: What are Consumer Surplus, Producer Surplus, and Allocative Efficiency? 9 Views


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What are Consumer Surplus, Producer Surplus, and Allocative Efficiency? Consumer surplus is a measurement of the extra consumer benefits and satisfaction derived when prices are lower than what the market can bear. Conversely, the producer surplus is a measurement of the extra benefit to a producer when the market supports a higher price than the producer’s expected sales price. Allocative efficiency is a characteristic of the market that measures the degree of information in the market and the resultant maximum level of benefit enjoyed by all parties involved when capital is spent the most efficiently.

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Transcript

00:00

And finance Allah shmoop What Our consumer surplus producer Surplus

00:07

and Alec A tive efficiency shmoop in economics Surplus happens

00:13

when you're getting more than you bargained for When the

00:16

sweet smell of surplus is in the air it means

00:17

somebody got a great deal either a consumer or a

00:20

producer If you're a consumer surplus means you paid less

00:24

for a good or service then you would have been

00:27

willing to pay For example let's look at a Karlis

00:30

pregnant city dweller whose water just broke Yeah since the

00:34

baby's saying It's Hypo time A mom's willing to pay

00:39

a lot of money for a new uber to the

00:41

hospital She might even be willing tio by the uber

00:44

car there She really rather not have her baby's first

00:47

sight to be that of a rat running into a

00:49

gutter with an entire slice of pizza sending the wrong

00:52

message You know but since it's just a normal of

00:54

uber ride on a normal day in normal time well

00:57

she ends up paying a normal price for that uber

00:59

ride to the hospital because the benefit she's getting is

01:02

much higher than the price she'd be willing to pay

01:04

for that ride She's reaping a consumer surplus on that

01:08

ride Well consumer surpluses that area on your typical supply

01:11

and demand curve right under the demand curve there but

01:14

above where the two curves cross like right in there

01:17

Which makes sense if you think about it the demand

01:19

curve which is also the marginal utility curve represent what

01:22

you're willing to pay for a thing right What seems

01:25

fair Anything above that line has you saying Hey man

01:28

what a rip off No way No way I'm paying

01:31

that much while anything below that line has you saying

01:34

Wow What a great deal Too good to pass up

01:36

if you ask me if your producer Well surplus means

01:39

you can get away with selling a good or service

01:41

for a higher price than you would have been willing

01:44

to sell it for Cha Ching Take virtual reality headsets

01:48

Well the first V R headsets were the only ones

01:50

on the market making them rare and you know super

01:53

hi tech gyms The sole producer of the V R

01:55

headsets capitalized on the V R hype and the rarity

01:58

of it all by setting prices is high much higher

02:01

than the price they needed to sell them at in

02:03

order to cover all the cost that went into making

02:05

them In layman's terms we might call this a price

02:08

mark up But people were willing to pay that higher

02:11

price to look like a blindfolded fool and enter other

02:14

realms So that's what the producers charged wouldn't you On

02:18

the supply and demand graph producer surpluses the area above

02:21

the supply curve which is also the marginal cost curve

02:24

but below where the two curves cross right in there

02:27

The actual line of supply curve is what producer willing

02:29

to sell their product for they won't sell anything below

02:32

the line since that would mean they wouldn't even be

02:34

covering their marginal cost like they'd be losing money on

02:37

every sale But selling above the line well thats extra

02:40

profits The higher producers can set their prices above their

02:43

marginal costs assuming consumers are willing to pay for it

02:46

Well the more profits the producer surplus They're reaping what

02:50

happened when Mohr companies started to make Mohr v R

02:53

headsets and there was competition in the marketplace with Mohr

02:55

v R Options on the market v R Headsets became

02:58

less rare When things to buy become more common prices

03:02

go down Yeah whereas one company making V R headsets

03:05

used to enjoy the make it rain monopoly power of

03:09

price setting multiple companies making V R headset makes the

03:12

market competitive When consumers air shopping around in comparing prices

03:16

producers turning to price takers that is they can no

03:19

longer sell their V R Headset said Well pretty much

03:22

any price they want at such high prices because consumers

03:25

will just go buy the same thing cheaper elsewhere Competition

03:29

makes producer surplus shrink and shrink away If the V

03:32

R headset market was perfectly competitive which would be all

03:35

the our headsets made by all producers were exactly the

03:38

same Well then producer surplus would pretty much completely disappear

03:42

meaning it was a total commodity market when both consumers

03:45

and producers feel like they're getting a fair shake or

03:48

a fair trade while money for v R headsets In

03:50

this case we have what's called Alec a tive efficiency

03:53

Well the elegant efficient point is we're supplying demand or

03:56

marginal cost and marginal benefit Cross consumers feel like they're

04:01

getting what they paid for not getting ripped off and

04:03

not getting a deal Producers are no longer rolling around

04:06

in beds covered in producer surplus money but they're not

04:09

losing money either When things were sold at analogue a

04:12

tive efficient level everybody's getting what they paid for no

04:15

more no less All the value is fair Which yeah

04:18

means that where their surplus there's inefficiency right If either

04:22

consumers or producers feel like they're getting a deal a

04:25

surplus while then the market isn't efficient Adam Smith's invisible

04:29

hand does its best to slap surplus out of the

04:31

markets with competition Making things fair for both sides doesn't

04:35

always work out that way But while the invisible hand 00:04:38.14 --> [endTime] you know does what it can

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