What does this economic surplus represent? The economic surplus is the
net value that society as a whole receives by producing and consuming
these 100 pizzas. It arises because firms and consumers have used
resources that have a lower value (as shown by the height of the supply
curve) and transformed them into something valued more highly (as
shown by the height of the demand curve). To put it differently, the value
from consuming the 100 pizzas is greater than the cost of the resources
necessary to produce those 100 pizzas—flour, yeast, tomato sauce, cheese,
and labour. Thus, the act of producing and consuming those 100 pizzas
“adds value” and creates benefits for society as a whole.
We are now ready to introduce the concept of market efficiency. In later
chapters, after we have explored consumer and firm behaviour in greater
detail, we will have a more detailed discussion of efficiency.
Economists say that a market for any specific product is efficient if the
quantity of the product produced and consumed is such that the
economic surplus in that market is maximized. Note that this refers to the
total surplus but not its distribution between consumers and producers.
Let’s apply this concept of efficiency to the pizza market shown in Figure
5-6 and ask, What level of pizza production and consumption is
efficient? Consider the quantity of 100 pizzas. At this quantity, the shaded
area ① shows the total economic surplus that society receives from
producing and consuming 100 pizzas. But if output were to increase
beyond 100 pizzas, more economic surplus would be generated because