Economics: Consumers, Producers, and the Efficiency of Markets

Difficulty: 1/3 (Very little confusing opposite concepts like normal vs. inferior, etc.)
Review: 3/5 (Repetitive for a chapter, felt like the chapter was too simple to really be a chapter)

The chapter starts off with the simple concept of 'willingness to pay', all in the name really. It's how much the buyer values the good, at a certain price, the buyer won't be willing to buy it any more. Since the price drifts towards the equilibrium, the buyer's purchase price is often going to be below the buyer's maximum (willingness to pay value). Mankiw now introduces consumer surplus, the difference of the willingness to pay to what the buyer actually pays- this means the greater the consumer surplus, the better deal the buyer thinks they get.

Mankiw uses staircase graphs to show this, but to put in terms more mathematically, one can envision integrals as learned in calculus, where the x-axis can be represented by the equilibrium price line and the integral represents the area between the sloping demand and the price. Mankiw only uses rectangular staircases to demonstrate small scale examples of this as to simplify the explanation.

Lower prices will not only benefit new consumers now willing to pay but initial consumers save more as well.

There is also producer surplus which corresponds to cost and willingness to sell, really the same explanation as the consumer surplus except instead the surplus area is above the upwards sloping supply curve.

Higher prices will not only benefit new suppliers but also benefits initial suppliers who now ear more as well.

Again, the book demonstrates the perfect free market where equilibrium once again triumphs with providing the best scenario with giving both buyers and sellers maximum surplus. But this will not always be the case, Mankiw notes, foreshadowing the coming complex chapters.