Consumer and Producer Surplus- Micro Topic 2.6 (Holiday Edition) [MUSIC PLAYING] - Hey, I'm Jacob Clifford. Welcome to ACDC Econ. Well, it's the holidays-- a great time to drink hot chocolate, learn about consumer surplus, producer surplus, and deadweight loss, then go outside and play in the snow. Oh! [MUSIC - "DECK THE HALLS" INSTRUMENTAL ROCK VERSION] OK, here we go. Let's look at the market for Santa hats. The demand basically shows the number of people who are willing to buy hats at different prices. If the price is high, then less people want to buy hats. And if the price is low, then more people want to buy them. The supply shows the number of producers that are willing to make hats. If the price is low, then very few producers want to make them. And if the price is high, then more producers want to make more hats. Supply and demand come together and set the equilibrium price and quantity, let's say $5 and 4,000 hats. (CHILDREN OFF-SCREEN) $5 and 4,000 hats. Now, the demand curve shows that someone out there's willing to pay $8. They didn't. They paid $5. That's called consumer surplus. It's the difference between what you're willing to pay for something and what you actually do pay. The area of combined consumer surplus is this triangle right here. But what about the person who's willing to pay only $4? Well, they don't get it. They don't value hats enough. Now, the supply curve shows that there's a producer with a super low opportunity cost that's willing to sell hats for $2. But every producer that's willing to sell hats for less than $5 makes producer surplus. It's the difference between the price and what a seller's willing to sell something for. But what about the producers that are willing to sell hats, but only if they can make more than $5? Well, they don't make a sale. Their costs are just too high. The combined producer surplus is the triangle right here. And so consumer surplus plus producer surplus, or total surplus, is right here. Now, take a step back and look what's happening. Markets are extremely efficient at allocating or distributing resources. The people who want Santa Claus hats the most get it, and they're made by producers with the lowest possible costs. That's awesome. Thanks, markets. But what happens when a market's not in equilibrium? Well, let's say the government established the price ceiling at $3. (CHILDREN OFF-SCREEN) The government established the price ceiling at $3. At that low price, consumers want to buy 6,000 units. But the producer's only going to produce 2,000 units. That's called a shortage, and the result is deadweight loss. Now, the question is, do you see it? Pause the video. See if you can figure out where there's producer surplus, consumer surplus, and this new thing called deadweight loss. Play in the snow. Oh! It's in my mouth. I totally missed you. Yeah, you did. OK, now that the price is lower, the producer surplus gets lower. It's right here. All the producers that are willing to sell above $3 are now out of the market. Since now there's less output, the consumer surplus is right here. It's the difference between what consumers are willing to pay and what they actually did pay-- $3. That means the deadweight loss is right here. It represents the lost efficiency that occurs when the market doesn't reach equilibrium. We're not making the amount that society actually wants. When you compare the two markets, the one at equilibrium and the one with the price ceiling, you can tell that it's inefficient. There's some consumer surplus and producer surplus that's missing, and so consumers and producers can benefit if we produce more output. Does it make sense? OK, let's do it again, except this time let's see what happens when there's a price floor. Now the government says, the price can't go lower than $7. And the result is a surplus. Producers want to make 6,000 units, but consumers are only willing to buy 2,000 units. The question is, where's consumer surplus, producer surplus, and deadweight loss? Play in the snow. Oh! You got me that time. [LAUGHTER] All right. The price is higher, so consumer surplus becomes smaller. It's right there. And the producer surplus is right here, so right there's the deadweight loss. Did you get that? Again, it's easy to see. If we produce too little output, we're going to end up with deadweight loss. If you're enrolled in a microeconomics class, get used to this idea of deadweight loss. It comes up all the time when you see taxes and tariffs, monopolies, and both positive and negative externalities. In every case, there's something preventing the market from achieving the most efficient outcome. All together, deadweight loss is one of the most important concepts in microeconomics. (CHILDREN OFF-SCREEN) Deadweight loss is one of the most important concepts in microeconomics. [SIPPING] Bonus round. [DING] Let's use a supply and demand graph to show that Christmas shopping actually causes deadweight loss. Markets adjust to consumer demand. So when you buy things for yourself, then markets are generally efficient. There's no deadweight loss. But when your aunt Clara gives you a gift that you don't really want or that she paid a whole lot more than you would, that causes deadweight loss. The demand curve shifts to the right, and so the quantity that society actually wants is here, but the quantity actually produced is right here. The result is deadweight loss. The graph shows that the cost for each one of these units are higher than the benefits society has for them. These units should never have been produced. So now's a good time to call your aunt, or maybe your grandparents, tell them you're taking microeconomics and you're learning about deadweight loss, and most importantly, you prefer cash this Christmas. Thanks for watching, till next time. Hey, thanks watching ACDC Econ. If you want to learn more about the deadweight loss of gift giving, go ahead and click right here. If you have to review for an exam or if you want my study guides, go ahead and click right here. Also, please make sure to Subscribe and Like and tell me what you think in the comments below. For those that you celebrate Christmas, happy Christmas, or merry Christmas. And those who celebrate Hanukkah, happy Hanukkah. For those people who Kwanzaa, happy Kwanzaa. People who are atheists, happy atheist day. All those great things. Until next time.