Consumer Surplus and Producer Surplus
Draw hypothetical demand and supply curves for a typical product, say coffee. Now show the areas of consumer and producer surplus. Under what circumstances is the market likely to be efficient?
Demand is the quantities of the commodities that a buyer is willing and able to pay and purchase at the given price at a given period of time. Supply is the quantities of the commodities that a supplier is willing and able to sell at the given price at the given period of time.
Consumer surplus refers to the difference between what a consumer is willing to pay for the goods or services and what he/she actually pays. Producer surplus is the difference between what a producer was willing to earn and what he actually earns from the selling of goods and services in the market.
In the above figure, the quantity of coffee is measured along the x-axis, and the price of coffee is measured along the y-axis respectively. The triangular area labeled by A in the figure shows the area of consumer surplus which shows that the equilibrium price of coffee in the market is less than the actual amount that the consumers were willing to pay. Likewise, the triangular area labeled by B shows the producer surplus which shows that the equilibrium price of coffee received by the producers in the market is more than what the buyers were willing to pay.
In the figure, the market is efficient at the point where the market demand curve and supply curve are intersecting each other at point E where the consumers are ready to buy and the sellers are ready to sell the coffee of OQ quantity at the OP price level.