Chapter 7: Consumers, Producers, and the Efficiency of Markets

Chapter Seven is titled “Consumers, Producers, and the Efficiency of the Market”. The chapter primarily focuses around the idea of allocation of goods and resources as well as including market efficiency. The three main ideas discussed in the chapter are producer surpluses, consumer surpluses, and market efficiency.

Producer and consumer surpluses are very similar concepts: both include a difference of a preferred price (stemming from a personal perspective) and the actual price. A consumer surplus is the difference between an amount a buyer is willing to pay and the amount they actually pay for it. A consumer surplus is raised by lowering prices because of the larger difference between the preferred price for the good and the actual price paid for the good. Consumer surplus could be measured through the sum of many consumers’ surpluses if there is more than one person involved in the case specified. Although consumer surplus itself does not reflect economic well-being of a consumer, it is useful for making judgements of the desirability of market outcomes.

Producer surplus is a concept similar to consumer surplus but it applies to the supplier of a good. For the producer surplus, people take the difference between the pay for the job versus the cost to finish the job. However, unlike consumer surplus, a higher price increases consumer surplus due to the fact that it increases the price for a good or service for the same cost of producing said service or good. But, on the other hand, since both producer and consumer surplus are so alike, economists usually use them together (such as to calculate market efficiency).

Market efficiency occurs when the allocation of resources maximizes total surplus (calculated by subtracting the value to buyers and the cost to sellers). This occurs between the equilibrium of supply and demand, but could not reach peak efficiency if there are externalities or market power, making the market more prone to market failure.

A rather unorthodox example of market efficiency is the debate over whether or not there should be a market for organs. Since organs cannot be sold for cash (the federal government imposes a price ceiling of $0), there is always going to be a shortage for organs. People would argue that if there was a market for organs, there would not be a shortage of organs and less people would die from failure to find a suitable organ donor (even though it would benefit the highest bidder the most). The idea of an organ market is controversial, but it could be argued that a market for organs would be helpful for lessening a shortage for people who soon cannot live due to failure of organs.