Markets: Consumer and Producer Surplus- Micro Topic 2.6

hey Internet this is Jacob Clifford and

welcome to my YouTube channel now with

60 million views you might consider me a

minor internet celebrity which means

sometimes I get noticed in public and I

get requests for shoutouts on Twitter

and on my channel anyways last week I

got an email from a student that no joke

requested a lock of my hair my hair is

not to be meddled with so what do you

think should I give it to him it's

totally a reasonable that I say no

because let's face it this is pretty

creepy I mean I don't know this person

maybe he's taking my hair he's gonna put

in a crime scene and frame me for murder

but if I say yes I have to decide if I

should give it to him for free or sell

it to him so obviously the cost of

producing hair for me is zero so maybe

it makes the most sense just to give it

to him for free but I still have to cut

my hair go to the post office and mail

it and of course he might not be the

only person who values my hair I don't

know maybe there's some other guy who's

willing to pay $20 for it if I just give

it to this other guy for free then I'm

basically giving up that $20 my point

here is even something that's free to

produce like hair is not really free

there's always an opportunity costs and

if the guy that emailed me is going to

get my hair then it makes sense that he

cover my cost so the explicit costs of

getting a haircut and going the post

office and mailing out the hair and the

implicit cost of my time and my energy

and if I ask him for any money at all

that means I'm just selling him my hair

so I have to figure out what price to

charge to him and maybe the next person

that asks for my hair which means I have

to be able to understand and analyze a

market the market demand curve that you

learn about an econ is actually made up

of individuals for example let's say

there's four students and they're all

interested in getting a lock of my hair

so let's say the price is $100 the only

person who would pay that much is Sam

he'd be willing to buy one now if the

price falls down to 80 then he'd still

be willing to pay but so would Tyler so

there'd be two people who want to buy my

hair and if the price fell even further

down to $60 then Sam Tyler and Sara

would all want to buy one unit and if

the price fell all the way down to 40

then Sam would buy two Tyler would buy

two Sara would buy one and this new

person Levi would also want to buy one

you get

the idea people are different so they

have a different willingness to pay when

you add up all these individual

preferences you get the market demand

and can draw down a sloping market

demand curve and the market supply curve

is created the same way it's based on

the cost and preferences of individual

sellers now in this case I'm the only

supplier of Clifford hare but the same

principles apply if the price is

anything below $20 and it's just not

worth it it doesn't cover my opportunity

cost that the price was $20 maybe I just

saw one just for fun but if the price

goes up to 40 I'd sell - if it goes up

to 60 I'll sell three that goes up to 80

and I'd sell four locks of my hair

notice as price increases individual

producers have an incentive to bring

more products to the market which

results in an upward sloping supply

curve when you put the supply with the

demand you get equilibrium that's easy

you learn that in your class but you

probably haven't thought about is how

ingenious and amazingness is for

organizing society and distributing our

scarce resources imagine instead that

there wasn't a market and I randomly

gave out locks of my hair to random

students this chances that I would pick

the exact students that want my hair the

most is pretty low but a market solves

that problem markets cause goods and

services to flow to the consumers that

want them the most and they prevent the

inefficient use of our resources you

might not think that's a big deal but

I'm telling you it's like the biggest

deal everything around you right now

exists because of this market system

your phone or your computer that you're

watching this video on YouTube itself

your clothes your house all this stuff

exists because supply and demand

allocated resources toward their

production if there was an endless

supply of resources than we wouldn't

actually need markets every person would

just get everything they want but now

let's go back to the numbers do you

remember Levi's he was willing to pay

$40 for lock of hair but he doesn't get

a lock and you might feel bad for him

but if somebody's gonna miss out because

of scarcity it's best that it's him he

values the hair the least in fact if he

got one that would be extremely

inefficient because the value he places

on it that $40 is less than my

opportunity cost of producing the fourth

unit in other words markets tell

producers exactly how much to produce

they don't over allocate resources

towards things that people don't really

value which is a

amazing markets are awesome you can clap

now in your standard microeconomics

class you have to be able to take this a

step further and identify and calculate

consumer and producer surplus

remember that Sam was one to pay a

hundred dollars for a lock of hair but

he didn't pay a hundred he paid the

market equilibrium of 60 the difference

that $40 is Sam's consumer surplus it's

the difference between what individual

consumers are willing to pay for a good

or service and what they do pay and it's

not just Sam it's also Tyler remember

he's one to pay up to $80 for the lock

of hair but he didn't pay 80 he paid 60

so that $20 is Tyler's consumer surplus

know what about Levi he was willing to

pay up to $40 for a lock of hair and the

market equilibrium price was 60 so he

didn't get the product he gets no

consumer surplus graphically the

consumer surplus is this triangle right

here in some classes you have to

actually calculate it to remember it's

just the area of a triangle one-half

base times height in this case the base

is three units and the height is $40 so

the consumer surplus is $60 I know I

cover that quick make sure to watch the

end of the video where I give you some

practice multiple choice questions so

you can do those calculations now

producer surplus is the exact same idea

except we're looking at sellers so it's

the difference between the price and how

much your seller is willing to sell a

product for for example I'm willing to

sell the very first lock of hair for $20

but I didn't sell it for 20 I sold it

for the market price of 60 so that $40

that difference is my producer surplus

for that first unit for the second unit

I was willing to sell it for $40 but I

sold it for 60 so that $20 is my

producer surplus for the second unit

what about the fourth unit that I had a

super high opportunity cost you had to

pay me a lot to go sell the fourth unit

where's the producer surplus there is

none I wasn't actually able to sell that

unit so just remember you can't get

producer surplus or a consumer surplus

from units that were never bought or

sold the actual area of producer surplus

is this triangle down here and together

consumer surplus and producer surplus

make up this area which is total surplus

and this shows why markets are so darn

efficient they allow as many buyers and


as possible to benefit from voluntary

transaction people who don't really want

the product don't get it and high-cost

producers that have a high opportunity

cost don't sell it it's a super

efficient way to organize society and

distribute scarce resources for example

let's say I produce only one lock of

hair this is an efficient because

there's lost consumer and producer

surplus or total surplus is less

economists have a really cool name for

this lost efficiency when you're

producing the wrong output

it's called deadweight loss trust me

you're gonna see it over and over again

in a microeconomics class you get be

able to identify it and calculate it so

don't be afraid of deadweight loss let's

look at the other side let's say I

produce four units that two would be

inefficient and cause deadweight loss

the reason why is because the cost of

producing that fourth unit is greater

than what society is willing to pay for

it so the markets saying don't put your

resources and producing more hair

society doesn't want this stop producing

produce less I'm sorry I get all geeked

out on this but markets are awesome but

except when they're not there's a detail

I left out from the email from the guy

who wanted my hair reason why was

because his teacher said he'd give him a

perfect score in the class if he did

weird so now what should I do because

there might be some unforeseen costs so

if I go with the market solution and

sell this student my hair then he's not

really gonna learn economics in fact the

only thing is gonna learn is how to get

around and cheat the system which sounds

to me like the making of a serial killer

that would definitely frame me for a

murder I never mind the fact the teacher

would probably get fired for this

because let's be honest so against the

rules so now I have to decide do I want

a market that's efficient or do I want

to be ethical and that's exactly why

sometimes markets need to be regulated

or abandoned for example human organs

like the market for kidneys a free

market purist would point out there's

people out there that are on dialysis

that really want a kidney and there's

healthy people out there that at the

right price are willing to sell it they

would argue that a market would maximize

total surplus and result in the most

efficient outcome but there's a solid

argument against selling kidneys for

ethical reasons but let me point out

this is not the norm and the vast

majority of cases markets the preferred

way to allocate our resources but is it

what I should do here in this situation

with this guy that wants

my hair I'm gonna let my viewers decide

so let me know in the comments if you

think I should give him my hair or

selling my hair if I shouldn't do any of

that I want to know what you think

because I don't want to be considered a

sellout but don't go anywhere because

it's time for a pop quiz before I do

that let me give you the memory tool

that's gonna go on the back wall for

this episode well actually there's gonna

be two of them the first one I need some

scissors for horrible scissors for this

oh boy a lock of my hair this right here

is going to remind you about markets and

efficiency and consumer and producer

surplus and the whole idea that a demand

curve is made up of individuals and

their willingness to buy and a supply

curve is made up of individuals and

their willingness to sell and the other

one is going to be this right here this

represents the idea of dead weight loss

and inefficiency and the idea that when

a market is not producing what it's

supposed to produce you get deadweight

loss now I'm gonna give you the quiz

keep in mind that the questions won't be

on the screen for very long so you have

to pause the video answer the question

then look in the comments below for the

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next time