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A market is efficient when it provides the most consumer surplus and the most producer surplus possible. An inefficient market creates what economists call a deadweight loss.
Consumer Surplus is defined as the difference in the market price of a good and how much an individual or individuals would be willing to pay.
An example would be a person who is willing to spend $4 on a milk shake but the price is only $3 yielding a surplus of $1.
Producer Surplus is defined as the difference between what it costs to produce a good and what price the market provides.
An example would be a firm that makes milk shakes for $2 and sells them for $3 yielding a producer surplus of $1.
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