ShmoopTube

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And finance Allah shmoop What Our consumer surplus producer Surplus

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and Alec A tive efficiency shmoop in economics Surplus happens

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

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sweet smell of surplus is in the air it means

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somebody got a great deal either a consumer or a

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

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for a good or service then you would have been

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

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pregnant city dweller whose water just broke Yeah since the

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

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a lot of money for a new uber to the

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hospital She might even be willing tio by the uber

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

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sight to be that of a rat running into a

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gutter with an entire slice of pizza sending the wrong

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

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uber ride on a normal day in normal time well

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she ends up paying a normal price for that uber

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

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

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

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ride Well consumer surpluses that area on your typical supply

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and demand curve right under the demand curve there but

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above where the two curves cross like right in there

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Which makes sense if you think about it the demand

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curve which is also the marginal utility curve represent what

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

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fair Anything above that line has you saying Hey man

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

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that much while anything below that line has you saying

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Wow What a great deal Too good to pass up

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if you ask me if your producer Well surplus means

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you can get away with selling a good or service

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for a higher price than you would have been willing

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to sell it for Cha Ching Take virtual reality headsets

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Well the first V R headsets were the only ones

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on the market making them rare and you know super

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hi tech gyms The sole producer of the V R

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headsets capitalized on the V R hype and the rarity

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of it all by setting prices is high much higher

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than the price they needed to sell them at in

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order to cover all the cost that went into making

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

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mark up But people were willing to pay that higher

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price to look like a blindfolded fool and enter other

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

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the supply and demand graph producer surpluses the area above

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the supply curve which is also the marginal cost curve

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but below where the two curves cross right in there

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The actual line of supply curve is what producer willing

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

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

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

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every sale But selling above the line well thats extra

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profits The higher producers can set their prices above their

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marginal costs assuming consumers are willing to pay for it

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

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happened when Mohr companies started to make Mohr v R

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headsets and there was competition in the marketplace with Mohr

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v R Options on the market v R Headsets became

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less rare When things to buy become more common prices

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go down Yeah whereas one company making V R headsets

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used to enjoy the make it rain monopoly power of

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price setting multiple companies making V R headset makes the

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market competitive When consumers air shopping around in comparing prices

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producers turning to price takers that is they can no

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longer sell their V R Headset said Well pretty much

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any price they want at such high prices because consumers

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will just go buy the same thing cheaper elsewhere Competition

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makes producer surplus shrink and shrink away If the V

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R headset market was perfectly competitive which would be all

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the our headsets made by all producers were exactly the

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same Well then producer surplus would pretty much completely disappear

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meaning it was a total commodity market when both consumers

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

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a fair trade while money for v R headsets In

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

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

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

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getting what they paid for not getting ripped off and

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not getting a deal Producers are no longer rolling around

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

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losing money either When things were sold at analogue a

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

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more no less All the value is fair Which yeah

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

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

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

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hand does its best to slap surplus out of the

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

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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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