Chapter 7 Journal

In this chapter, Mankiw explains the concepts of consumer and producer surplus and how they affect the market. Mankiw also begins to dive into the idea that the allocation of resources is not about just a simple relationship between supply and demand, but something that can affect the economic well-being of the buyers and sellers in a market. First, Mankiw explains that the idea of consumer surplus, which is buyers’ willingness to pay (the maximum amount buyers will pay for a good) minus the amount they actually pay for it. The bigger the difference, the more they buyers benefit. Producer surplus is a similar concept, but pertains to sellers, not buyers. Producer surplus is the amount sellers receive for their goods minus the costs of production (opportunity cost). This measures the benefit that buyers receive from participating in a market. The sum of consumer and producer surplus is called total surplus and if there is an allocation of resources that maximizes the total surplus, it is efficient. This means that all of the resources in the market are being used efficiently. Governments and policy makers are concerned with not only efficiency, but also equity, which is where the concept of welfare economics, or the study of how the allocation of resources affects economic well-being, becomes important. It has been found that centrally planned economies are not effective at allocating resources efficiently or equitably, so it is better to allow the invisible hand to allocate the market.