Why is the social gain from producing an additional unit of output of every
product equal to the vertical distance between the demand curve and the
marginal cost curve at that output level?
The vertical distance between the demand curve and the quantity axis at
every level of output equals the price the members of the community are
willing to pay to acquire that last unit of output. It therefore
measures the value of that unit of output measured by the amount of other
goods people are willing to give up to get it. The vertical distance between
the marginal cost curve and the quantity axis at every level of output
equals the increase in total cost associated with producing that unit
of output. It thus measures the amount of other goods that must be given
up to produce that last unit. When price exceeds marginal cost,
the amount of other goods the community is willing to give up to get an
additional unit of output of a commodity is greater than the amount of
other goods that they are required to give up to get that additional unit.
The excess of what people are willing to give up over the amount they have
to give up represents a net gain from having the last unit of the commodity
being produced.
The area above the marginal cost curve and under the demand curve thus
represents the social gain from producing all units of the commodity---that
is, the sum of the gains from producing each individual unit in sequence.
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