IB Economics 2.3.5 Social/community Surplus Notes

Social Surplus: Consumer Plus Producer Benefit

1. Social surplus, also called community surplus, is the total benefit a market creates for society: consumer surplus plus producer surplus, $\text{social surplus} = \text{CS} + \text{PS}$.
2. Consumer surplus is the gain to buyers who pay less than the most they would pay; producer surplus is the gain to sellers who receive more than the least they would accept.
3. On the diagram, stacking the two triangles fills the whole area between the demand curve (marginal benefit, $D = MB$) and the supply curve (marginal cost, $S = MC$), up to the equilibrium quantity $Q^*$.
4. That combined area is society's total net benefit from the good, and it is largest at the competitive equilibrium.
5. Competitive markets like the global wheat market tend to generate a large social surplus, because trade keeps expanding until every gain from exchange is captured.
6. To find the total, calculate consumer surplus and producer surplus with the triangle areas from 2.3.4, then add them.

Away from the Equilibrium Quantity, Welfare Is Lost

1. Social surplus is largest at the competitive equilibrium quantity, where $D = MB$ meets $S = MC$.
2. Produce less than $Q^*$, or push output past it, and the combined area shrinks, so society loses net benefit.
3. That lost benefit is the deadweight loss (welfare loss), the area between the demand and supply curves over the units no longer traded.
4. For example, a price held below equilibrium at $P_1$ leaves the quantity supplied $Q_s$ short of the quantity demanded $Q_d$, a shortage, and opens a deadweight-loss triangle between $Q_s$ and $Q^*$.
5. Exactly why the equilibrium quantity maximises the total, and how the deadweight loss is measured, comes in 2.3.6.