Okay, we're going to begin on the worksheet
called Social Surplus Basics. We have a very
simple setup here in terms of what you can
actually control. There's only one control.
You can select the quantity. And when you
do that it moves the.... this vertical line
either to the right or to left. That's the
quantity axis. So that's what you're controlling.
The issue is to interpret what's actually
going on in the graph and then if explore
it later what's going on in the plotting of
this. So this downward sloping blue line is
the demand or marginal social benefit curve.
This upward sloping red line is the supply
or marginal social cost curve. And we remember
from the calculus that the area under the
curve gets back the function. So the area
under the blue curve....under the blue line
represents the social benefit. The area under
the red line represents the social cost. This
shaded region in light blue here is the difference
between those two and that is called the social
surplus. So we're measuring the net of social
benefit netting of social cost. That is the
social surplus.
And what's plotted in here, we have social
surplus and then we have... Let me click away
from there a second so you can see that again.
Then we have something class the deadweight
loss. The deadweight loss is this triangle.
This bigger triangle doesn't shift as you
change output. So as you get more social surplus
you get less deadweight loss.
Where is social surplus maximized? Let me
see if I can get there exactly. It's maximized
where the marginal social benefit equals the
marginal social cost or where supply equals
demand right here. If you go further and you
continue to increase output, now marginal
social cost exceeds marginal social benefit
and you start actually getting negative surplus.
This is not good to get. So the best you can
do is to reduce that and go to here.
And the first result in the class, or at least
in this discussion of cost-benefit analysis,
is that the equilibrium where supply equals
demand maximizes the social surplus. That's
theresult you want to get from this.
