00:01
So here we have a market for pizzas, right? we have a market and a market as always is characterized by a quantity and a price.
00:09
It is characterized by a supply curve and by a demand curve and we want to think about what price total surplus is maximized and that's what we call efficiency, right? an economist would call an allocation an equilibrium efficient if the social surplus is maximized and this is typically where supply is equal to demand, right? so my argument here is that this point is actually going to be the efficient point and this point looks to be consistent with a price of eight.
00:48
Now why does this maximize surplus? well the key thing is if we think about this point here as being the efficient quantity, any point to the left here has positive surplus, right? it has positive surpluses.
01:05
There's a contribution to consumer surplus and a contribution to producer surplus but any point on the other side has negative surplus, right? you see how the lines are sort of flipped in direction? here the consumer and producer surpluses are negative so we don't want any units that generate negative surpluses but we do want all the units that generate positive surpluses and that point happens where supply equals to demand.
01:33
So at this point, right, my consumer surplus would be this area up here, my producer surplus would be this area down here, consumer surplus, producer surplus, so we're going to need to label some points...