11. Markets And Consumer Welfare
Market transactions make buyers and sellers better off. When a consumer
buys pho, she does so because she prefers to satisfy her hunger rather than
keep VND6,000 in her pocket. The pho shop is pleased to sell because they
prefer to earn money instead of keeping pho on hand. When many
consumers buy many bowls of pho from many sellers, they are all better
off.
The gams that buyers and sellers receive from market transactions
contribute to the economic welfare (we will deliberately define this
concept in other articles). We analyze consumers' gains with the demand
curve shown below. Price (VND/unit) is on the vertical axis and quantity
demanded (units/time period) is on the horizontal axis. Demand slopes
down because consumers increase quantity demanded as price falls.
In a competitive market consumers all pay the equilibrium price (P*).
But, according to our demand curve, if the quantity were restricted, some
consumers would be willing to pay higher prices. These consumers receive
consumer surplus equal to the difference between the value they perceive
from the good and the equilibrium price.
