Chapter Seven: Consumers, Producers, & the Efficiency of Markets (Level of difficulty 1 ½)

            The outline of this chapter covers how the allocation of resources determines the well-being of an economy, where equilibrium in supply and demand would maximize the total benefits shared by buyers and sellers. Buyers are dependent on how much they value a certain good, thus their willingness to buy the good placed in the market. Leading to the consumer surplus, which is willing amount paid minus the actual paid price, or the area below the demand curve and above the price. Consumer surpluses regularly show the preference of buyers. On the other hand, to the seller there is a focus on opportunity cost, and the producer surplus which is determined by subtracting the seller’s own cost from the amount the seller is being paid. In other terms the supply surplus is the area below the price and above the supply curve. Total surplus is generated by subtracting the cost to sellers from the value to buyers. This would measure the efficiency, maximization of total surplus received by society, and equality, uniformly distributed economic prosperity among the members in society. Free markets do not only allocate supply of goods to buyers who value them more highly it also allocates the demand for goods to sellers that can produce at the least cost, while also maximizing the sum of consumer and producer surplus by producing the required amount of goods. Market failures , when resources are used inefficiently, occur when there is a market power that stimulates the activity of supply and demand in an artificial way keeping away from the equilibrium price and quantity, or when externalities cause welfare to depend more than just the value to buyers and cost to sellers.