2.6 Market Equilibrium and Consumer and Producer Surplus

Market equilibrium is the price where quantity demanded equals quantity supplied, the intersection of the two curves. At any other price, shortage or surplus pressure pushes the market back toward it.

Consumer surplus is the gap between what buyers are willing to pay and the price they actually pay: the triangle below the demand curve and above the price line. Producer surplus is the gap between price and sellers' minimum acceptable price (their marginal cost): the triangle above the supply curve and below the price line. Each triangle's area is ½ × base × height on linear curves.

Total surplus (consumer + producer) is maximized at the equilibrium quantity, which makes the free-market outcome allocatively efficient when there are no externalities. Every unit worth more to buyers than it costs sellers gets produced, and no unit that costs more than it is worth does.