Pareto Principle

And finance Allah shmoop What Our consumer surplus producer Surplus

and Alec A tive efficiency shmoop in economics Surplus happens

when you're getting more than you bargained for When the

sweet smell of surplus is in the air it means

somebody got a great deal either a consumer or a

producer If you're a consumer surplus means you paid less

for a good or service then you would have been

willing to pay For example let's look at a Karlis

pregnant city dweller whose water just broke Yeah since the

baby's saying It's Hypo time A mom's willing to pay

a lot of money for a new uber to the

hospital She might even be willing tio by the uber

car there She really rather not have her baby's first

sight to be that of a rat running into a

gutter with an entire slice of pizza sending the wrong

message You know but since it's just a normal of

uber ride on a normal day in normal time well

she ends up paying a normal price for that uber

ride to the hospital because the benefit she's getting is

much higher than the price she'd be willing to pay

for that ride She's reaping a consumer surplus on that

ride Well consumer surpluses that area on your typical supply

and demand curve right under the demand curve there but

above where the two curves cross like right in there

Which makes sense if you think about it the demand

curve which is also the marginal utility curve represent what

you're willing to pay for a thing right What seems

fair Anything above that line has you saying Hey man

what a rip off No way No way I'm paying

that much while anything below that line has you saying

Wow What a great deal Too good to pass up

if you ask me if your producer Well surplus means

you can get away with selling a good or service

for a higher price than you would have been willing

to sell it for Cha Ching Take virtual reality headsets

Well the first V R headsets were the only ones

on the market making them rare and you know super

hi tech gyms The sole producer of the V R

headsets capitalized on the V R hype and the rarity

of it all by setting prices is high much higher

than the price they needed to sell them at in

order to cover all the cost that went into making

them In layman's terms we might call this a price

mark up But people were willing to pay that higher

price to look like a blindfolded fool and enter other

realms So that's what the producers charged wouldn't you On

the supply and demand graph producer surpluses the area above

the supply curve which is also the marginal cost curve

but below where the two curves cross right in there

The actual line of supply curve is what producer willing

to sell their product for they won't sell anything below

the line since that would mean they wouldn't even be

covering their marginal cost like they'd be losing money on

every sale But selling above the line well thats extra

profits The higher producers can set their prices above their

marginal costs assuming consumers are willing to pay for it

Well the more profits the producer surplus They're reaping what

happened when Mohr companies started to make Mohr v R

headsets and there was competition in the marketplace with Mohr

v R Options on the market v R Headsets became

less rare When things to buy become more common prices

go down Yeah whereas one company making V R headsets

used to enjoy the make it rain monopoly power of

price setting multiple companies making V R headset makes the

market competitive When consumers air shopping around in comparing prices

producers turning to price takers that is they can no

longer sell their V R Headset said Well pretty much

any price they want at such high prices because consumers

will just go buy the same thing cheaper elsewhere Competition

makes producer surplus shrink and shrink away If the V

R headset market was perfectly competitive which would be all

the our headsets made by all producers were exactly the

same Well then producer surplus would pretty much completely disappear

meaning it was a total commodity market when both consumers

and producers feel like they're getting a fair shake or

a fair trade while money for v R headsets In

this case we have what's called Alec a tive efficiency

Well the elegant efficient point is we're supplying demand or

marginal cost and marginal benefit Cross consumers feel like they're

getting what they paid for not getting ripped off and

not getting a deal Producers are no longer rolling around

in beds covered in producer surplus money but they're not

losing money either When things were sold at analogue a

tive efficient level everybody's getting what they paid for no

more no less All the value is fair Which yeah

means that where their surplus there's inefficiency right If either

consumers or producers feel like they're getting a deal a

surplus while then the market isn't efficient Adam Smith's invisible

hand does its best to slap surplus out of the

markets with competition Making things fair for both sides doesn't

always work out that way But while the invisible hand 00:04:38.14 --> [endTime] you know does what it can