Objectives

 Social/community surplus
 Calculations of social/community surplus (HL)

Social/community surplus
Concept

 Efficiency is a quantifiable concept, determined by the ratio of useful output to total input.
 Allocative efficiency refers to making the best possible use of scarce resources to produce
the combinations of goods and services that are optimal for society, thus minimising
resource waste.
 Productive efficiency refers to producing products at the lowest possible average costs.
 Allocative efficiency occurs by maximising the social/community surplus, which focuses on
achieving the greatest possible difference between the market equilibrium price and the price
that consumers actually have to pay and maximising the difference between the price that
producers are willing and able to accept and what they actually receive through the market
equilibrium price.

Why is achieving allocative efficiency so important under the condition of scarcity?

Productive Efficiency (MC=AC) and Allocative Efficiency (MC=AR)

 Productive efficiency refers to producing goods by using the fewest possible

resources, which implies producing at the lowest possible cost.
 If firms are producing at the productively efficient level of output, then we can
assume they are combining their resources as efficiently as possible.
 Resources are not being wasted and average production costs are as low as
possible.
 Allocative efficiency refers to producing the optimal combination of goods from
society's point of view.
 Allocative efficiency is achieved when the economy is allocating resources in such
a way that no one can be better off without making somebody else worse off ie
Pareto optimality.
 Productive efficiency is a necessary condition for allocative efficiency to occur,
but it is not enough in itself.
 Firms must not only be producing at their lowest possible average cost, they also
need to be producing the correct combination of goods that the society prefers – in
other words, the best combination of goods from the society's point of view.
 Achieving allocative efficiency involves maximising social/community surplus.

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Consumer surplus
 consumer surplus is the difference between the highest price consumers are willing
and able to pay for a good and the actual price they pay.
 It is the extra benefit consumers receive for paying a lower price than the one they
were prepared to pay.
 In Figure 1, the triangle abc indicates the consumer surplus gained when this
market is in equilibrium at point B.
 The equilibrium price is USD 10 per unit and the equilibrium quantity is 10 000
units.

Fi
gure 1. Consumer surplus.

 For the first 10 000 units, consumers were willing to pay prices at or above USD
10 each, as indicated by the demand curve and the yellow shaded area.
 Therefore they gain a consumer surplus, which is the area below the demand curve
and above the USD 10 price level.
 . This is why price competition in free markets is considered an advantage. The
lower the prices are in a market, the greater the consumer surplus.

Producer surplus
 Producer surplus is the difference between the lowest price producers are willing
and able to offer the good and the actual price that they receive for it.
 It is the extra benefit that producers receive from selling an amount of output at a
higher price than the one at which they were prepared to sell it.
 The producer surplus is represented in Figure 3.

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 Figure 3. Producer surplus.

 In Figure 3, the producer surplus is shown by triangle cbd. For the 10 000 units
sold they receive a price of USD 10 each, even though they were prepared to
accept a lower price for the first 9999 units, as shown by the supply curve.
 Therefore, they earn an extra benefit (producer surplus) which is the area above
the supply curve and below the price level of USD 10.

Social/community surplus
 Social/community surplus is the sum of the consumer surplus and producer
surplus. It is the total benefit gained by society when the market is at equilibrium.
 When a market is in equilibrium, with no external disturbances, it is said to be in a
state of allocative efficiency.
 As stated before, this means that the resources are allocated in the most efficient
way from a society's point of view.

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 Fig
ure 4. Consumer surplus + producer surplus = social/community surplus.

 In the absence of external influences, the costs of production for the industry or
firm are equal to the costs to society when producing a specific good or service.
 In this case, the supply curve represents the social cost curve and is called
the marginal social cost (MSC) curve.
 Again, in the absence of external disturbances and effects, the benefit that
consumers get from consuming a specific good or service in a free market is
equivalent to the benefit or satisfaction gained by society in the consumption of
such goods.
 In this case, the demand curve represents the social benefit curve or the marginal
social benefit (MSB) curve.
 From Figure 4 ,we can confirm that there is no point other than point B that
would result in a greater community surplus.
 This is the optimum allocation of resources from the society's point of view, and it
occurs when demand is equal to supply, or where the marginal social benefit of
consuming a good is equal to the marginal social cost of producing it.

Calculations of social/community surplus (HL)

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 Figure
1. Social/community surplus.

In Figure 1, you can see the triangle in yellow represents the consumer surplus: the area
below the demand curve and above the market equilibrium price. The triangle in blue
represents the producer surplus: the area above the supply curve and below the
equilibrium price. The social/community surplus simply adds the areas of the two
triangles together.

To find the values of these areas, simply apply the formula for calculating the area of a
triangle, using the values in the diagram for the lengths of the sides, as shown in the
examples below.

Consumer surplus
Area of a triangle = 0.5 × base × height
Area of consumer surplus = 0.5 × quantity × (price when quantity
demanded is zero – equilibrium price)
Area of consumer surplus = 0.5 × 10 000 × (USD 20 – USD 9) = USD
55 000

Producer surplus
Area of a triangle = 0.5 × base × height
Area of producer surplus = 0.5 × quantity × (equilibrium price – price when
quantity supplied is zero)
Area of producer surplus = 0.5 × 10 000 × (USD 9 – USD 0) = USD 45
000

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Community surplus = consumer surplus + producer surplus= consumer
surplus + producer surplus
= USD 55 000 + USD 45 000 = USD 100 000
Worked example 1

Figure 2. Market for

taxi rides in Moscow.
Figure 2 shows the market for taxis in Moscow, Russia. Use the information from the diagram to calculate:

1. Consumer surplus
2. Producer surplus
3. Social/community surplus

» Show answer
0.5 × base × height
0.5 × 9 000 × (RUB 30 – RUB17)
0.5 × 9 000 × RUB 13
RUB 58 500
0.5 × base × height
0.5 × 9 000 × RUB 17
RUB 76 500
RUB 58 500 + RUB 76 500
RUB 13 000

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