the value placed by consumers on additional pizzas is greater than the
additional costs associated with their production. Specifically, if
production and consumption were to increase to 200 pizzas, additional
economic surplus would be generated, as shown by shaded area ②.
Continuing this logic, we see that the amount of economic surplus is
maximized when the quantity is 250 units, and at that quantity the total
economic surplus is equal to the sum of areas ①, ②, and ③.
What would happen if the quantity of pizzas were to rise further, say to
300 units? For any pizzas beyond 250, the value placed on these pizzas by
consumers is less than the additional costs associated with their
production. In this case, producing the last 50 pizzas would actually
decrease the amount of economic surplus in this market because society
would be taking highly valued resources (flour, cheese, etc.) and
transforming them into pizzas, which consumers value less than the cost
of making them.
In our example of the pizza market, as long as the price is free to adjust to
excess demands or supplies, the equilibrium price and quantity will be
determined where the demand and supply curves for pizza intersect. In
Figure 5-6 , the equilibrium quantity is 250 pizzas, the quantity that
maximizes the amount of economic surplus in the pizza market. In other
words, the free interaction of demand and supply will result in market
efficiency. This result in the pizza market suggests a more general rule:
A competitive market will maximize economic surplus and therefore be efficient when price is
free to achieve its market-clearing equilibrium level.2