Market Equilibrium and Surplus
| English | Chinese | Pinyin |
|---|---|---|
| equilibrium | 均衡 | jūn héng |
| equilibrium price | 均衡价格 | jūn héng jià gé |
| equilibrium quantity | 均衡数量 | jūn héng shù liàng |
| producer surplus | 生产者剩余 | shēng chǎn zhě shèng yú |
| consumer surplus | 消费者剩余 | xiāo fèi zhě shèng yú |
| total surplus | 总剩余 | zǒng shèng yú |
| allocative efficiency | 配置效率 | pèi zhì xiào lǜ |
| marginal benefit | 边际收益 | biān jì shōu yì |
The price that clears the market
- Buyers want to pay as little as possible; sellers want to charge as much as possible.
- Yet markets settle on one price where their plans match exactly.
- At that price, the amount buyers want equals the amount sellers offer.
- It is the equilibrium 均衡 — and it comes with hidden gains for both sides.
Where demand meets supply
- Equilibrium is where the demand and supply curves cross.
- The equilibrium price 均衡价格 is where quantity demanded equals quantity supplied.
- The equilibrium quantity 均衡数量 is the amount actually bought and sold.
Find the equilibrium
Equilibrium sits where supply crosses demand. Above it there is a surplus; below it a shortage — the price is pushed back to where the two curves meet.
At market equilibrium:
Equilibrium is exactly where the two quantities match and the curves cross.
Consumer and producer surplus
- Consumer surplus 消费者剩余 is the area below the demand curve and above the price — buyers paying less than they were willing to.
- Producer surplus 生产者剩余 is the area above the supply curve and below the price — sellers getting more than they would accept.
- Both are triangles, so each area is $\tfrac{1}{2} \times \text{base} \times \text{height}$.
- Total surplus 总剩余 is consumer surplus plus producer surplus.
Consumer surplus is the area:
Consumer surplus = willingness to pay minus price, summed — below demand, above price.
Consumer surplus plus producer surplus equals ______ surplus.
Total surplus measures the whole gain from trading in the market.
Allocative efficiency
- At the competitive equilibrium, total surplus is as large as it can be.
- This is allocative efficiency 配置效率 — resources go to what society values most.
- It happens exactly where marginal benefit 边际收益 (from the demand curve) equals marginal cost (from the supply curve).
- Make less and MB > MC (a missed gain); make more and MC > MB (a waste).
Allocative efficiency occurs where marginal benefit equals marginal cost.
At MB = MC, total surplus is maximised — the efficient quantity.
Work out the surpluses
- Worked idea. Demand is $P = 20 - Q$; supply is $P = 2 + Q$.
- Set them equal: $20 - Q = 2 + Q$, so $Q = 9$ and $P = 11$.
- Consumer surplus $= \tfrac{1}{2} \times 9 \times (20 - 11) = 40.5$.
- Producer surplus $= \tfrac{1}{2} \times 9 \times (11 - 2) = 40.5$, so total surplus $= 81$.
Demand is P = 20 − Q and supply is P = 2 + Q. What is the equilibrium quantity Q?
Set 20 − Q = 2 + Q, so 18 = 2Q and Q = 9.
With equilibrium at Q = 9 and P = 11, and demand hitting the price axis at 20, what is the consumer surplus? (area of the triangle)
CS = ½ × base × height = ½ × 9 × (20 − 11) = 40.5.
Equilibrium is where supply meets demand (quantity demanded = quantity supplied). Consumer surplus (below demand, above price) plus producer surplus (above supply, below price) make total surplus, which is largest at the equilibrium — allocative efficiency, where MB = MC.