**benefit**” is used, equivalent to “

**used value**” or “

**utility**” in AL or other textbooks.

Exchange theorem: people

**exchange**only if the benefit is

**greater**than the equilibrium

**price**.

**Benefit = Max. willingness to pay/ max. demand-price of a good**

**TB**= benefit of consuming a given quantity of good.

**= ΣMB, MBn=TBn-TBn-1**

It’s assumed that MB is strictly decreasing.

**TC**= Least money to produce the good /

**min. supply-price of a good**,

**MCn=TCn-TCn-1=TVCn-TVCn-1**, note that

**TC=TVC+TFC=TFC+ΣMC**.

**MC curve = Supply curve**since cost of producing an additional unit is the minimum selling price, similarly

**MB curve = demand curve**.

**Consumer surplus (CS)**is consumer’s gain from market exchange. It’s the

**extra amount**that the consumer is willing

**pay more**than he actually pays. Mathematically,

**CS = TB-TE = ΣMB-PQ = Σ(MB-P)**. In the graph, we consider the area between P and MB. Continuity of the curve is considered.

**CS maximized as MB=P**.

**Producer surplus (PS)**= producer’s gain from market exchange. It’s the

**extra amount**that a producer actually

**receive above the min**. amount he must receive. Mathematically,

**PS = TR-TVC = PQ-ΣMC = Σ(P-MC)**(Note: PS is different from profit P = TR-TC, so that

**PS = P + TFC**) In the graph it’s the area enclosed by P-axis, MC curve and P curve.

PS is maximized as MC = P.

**Social surplus**is the total gain from market exchange for consumers and producers (as well as third party if necessary).

MSS=MB-MC,

**TSS=ΣMSS=CS+PS**. When MB>MC, MSS for additional unit>0, therefore it’s under-produced. Oppositely MC>MB implies MSS<0 for additional unit, then it’ll be overproduced. Therefore

**MC=P=MB implies equilibrium and maximization of TSS**.

For when the curve shifts in parallel manner,

**CS/PS/TSS changes in the same manner as the equilibrium quantity changes**. i.e., if Q increases, CS/PS/TSS increases.

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