Economic welfare – definition

Economic welfare is economic wellbeing expressed in terms of the sum of consumer and producer surplus – also known as community surplus.

economic welfare

Consumer surplus exists whenever the price a consumer would be willing to pay in terms of their expected private benefit is greater than they actually pay. Producer surplus exists when the price a producer would be prepared to supply at is less than the actual market price.

Assuming the demand curve is downward sloping and the supply curve is upward sloping, any transaction which creates an equilibrum will generate consumer and producer surplus – which in the diagram is the area A, B, E.

Economic welfare as measured by consumer and producer surplus is used to assess and evaluate the effects of changes in market conditions, including changes in demand, supply, price and quantity.