let's move on and introduce the concepts
of benefit cost at surplus resources are
allocated efficiently and in the social
interest when they are used in the ways
that people value the most highly this
is the same as saying that the marginal
benefit of consuming an additional unit
is the same as the marginal cost of
producing an additional unit in simpler
terms
it's where demand equals supply the
value of consuming an additional unit of
a good is known as the marginal benefit
think about it as the enjoyment of
consuming an additional unit the price
of a good is what we actually pay for it
regardless of how much we value the good
individual demand refers to the
relationship between price and quantity
demanded of a good or service by one
person take the pizza example on the
screen assume that this is a two person
market for pizza every point on the
highlighted demand curve represents a
price quantity combination that Lisa
would go for similarly the second curve
shows the quantities that Nick would
demand given the different prices the
market demand represents the combined
quantities demanded by both Nick and
Lisa in this example our entire market
and we get the market demand by adding
the quantities demanded at each price
mathematically speaking we're taking the
horizontal sum of Lisa and Nick's demand
curves as we already know each
individual demand curve can be thought
of as a marginal benefit curve
representing how much each individual
values an additional unit of a good the
market demand curve can thus be thought
of as the marginal social benefit curve
meaning that it represents how much the
entire market values an additional unit
of the good consumer surplus refers to
the excess benefit received from a good
over the amount paid for it
this means that when people buy
something for less than it is worth to
them less than they value it they gain
some amount of surplus let's look at our
two-person Pizza economy again but this
time let's assume that each slice costs
a dollar
Lisa would buy 30 slices in this
scenario if we consider the demand curve
to be a marginal benefit curve we'll
notice that the first 29 slices are
valued at more
by Lisa for example the tenth slice
seems to be valued at around two dollars
so for the tenth slice Lisa has a
surplus of $1 because she values it to
be $2 but only pays one it's only for
the thirtieth slice that Lisa values it
to be the same as the amount that she
pays for it thus for the thirtieth slice
her surplus is $0 to calculate her
individual surplus we need to calculate
the area that is under the demand curve
but above the price this is equal to the
area of the red triangle on Lisa's graph
and can be calculated as a dollar value
by using 1/2 multiplied by the base
times the height of the triangle which
is the formula for calculating the area
of a triangle I'll skip over calculating
Nick's consumer surplus since it is the
exact same process once we have the
market demand curve we can calculate the
total consumer surplus this can be
calculated by either adding all of the
individual surpluses so Nick and lisas
individual surpluses or it can be
calculated by finding the area under the
demand curve and above the price like we
did for Lisa's demand curve in this case
we can't use the formula for a triangle
for the market demand curve since the
shape isn't the proper triangle but we
can split the area up into different
shapes and find the surpluses that way
as well let's move on to the supply side
of things firms make a profit when they
receive more from the sale of a good
than its production cost the cost is
essentially what a firm gives up to
produce or how much money they have to
spend to produce the price is what the
firm receives when it sells that good
the marginal cost is the cost of
producing one more unit of good when we
talk about small changes in production
say 10 or 20 units of a t-shirt and a
factory the marginal cost often stays
the same it's when we want to increase
production by maybe a million units that
we might have to open up a new factory
hire more workers etc this is when the
marginal cost would change a producer
has to receive at least the marginal
cost per unit it produces in order to
make a profit
thus the firm won't produce unless the
price is equal to or greater than the
marginal cost
the supply curve can also be split up
into individual supply curves and the
market supply curve the individual
supply curve represents the relationship
between price and quantity supplied by
an individual producer this example is
similar to the pizza example for the
demand curve but it's from the
perspective of the producer again we're
gonna assume that we're in the two
producer economy where Mary and Max are
the only suppliers of pizza just like
with the market demand curve we can take
the horizontal sum of the two individual
supply curves to get our market supply
curve this is the same as adding the
quantity supplied at each price for our
individual producers just as our demand
curve could be seen as a marginal social
benefit curve we can call the market
supply curve the marginal social cost
curve this curve represents the cost of
producing an additional unit of the good
for the market not an individual
supplier producer surplus is defined as
the axis amount received from the sale
of a good or service over the cost of
producing it we're looking at how much
money the firm receives by selling the
good compared to how much it spends
producing the good in the highlighted
graph we can see that if Maria produces
the 50th unit it would cost her 10
dollars to produce it however the market
price is $15 so her surplus for the 50th
unit would be $5 if Maria produces at
her optimal quantity which is the
quantity associated with a $15 price she
would be producing 100 units to
calculate her producer surplus we would
take the area above the supply curve and
below the price and again this is a
simple triangle so we can use the 1/2
base times height formula to calculate
the area if we want to calculate the
total producer surplus we can either
take the sum of the individual producer
surpluses or we can calculate the area
above the supply curve and below the
price both will give us the same answer
again we can't use the formula for a
triangle since the shape looks more like
an arrow we could split it up into two
triangles in a rectangle or any other
combination of shapes that would allow
us to use simple geometric calculations
