2.6 Market Equilibrium and Consumer and Producer Surplus

a. Define (using graphs as appropriate) market equilibrium, consumer surplus, and producer surplus. b. Explain (using graphs as appropriate) how equilibrium price, quantity, consumer surplus, and producer surplus for a good or service are determined. c. Calculate (using data from a graph or table as appropriate) areas of consumer surplus and producer surplus at equilibrium.

• The supply-demand model is a tool for understanding what factors influence prices and quantities and why prices and quantities might differ across markets or change over time.
• In a perfectly competitive market, equilibrium is achieved (and markets clear with no shortages or surpluses) when the price of a good or service brings the quantity supplied and quantity demanded into balance, in the sense that buyers wish to purchase the same quantity that sellers wish to provide.
• Equilibrium price provides information to economic decision-makers to guide resource allocation.
• Economists use consumer surplus and producer surplus to measure the benefits markets create to buyers and sellers and understand market efficiency.
• Market equilibrium maximizes total economic surplus in the absence of market failures, meaning that perfectly competitive markets are efficient.
• Enduring understanding MKT-4: Although equilibria are stable, an economy can move from one equilibrium to another if market conditions change.