Consumer Surplus, Producer Surplus, and Allocative Efficiency

Your first donut tastes delicious and is totally worth the $2 it costs. The next one is still pretty good and...yeah, it was worth it #NoRegrets.

By your third, you're stuffed, and if you eat another one, you're bound to puke.

Now think about the market of donuts. Consumers are going to continue buying donuts until their happiness, or utility, per donut meets the cost per donut, a.k.a. the price. The total utility they get from consuming that many donuts is the consumer surplus.

Graphically, it can be seen as the area between the price line and the demand curve. On the other hand, the per-unit happiness for a supplier is the price at which the good is sold, because that's the money they get, and who doesn't like the green? Suppliers will continue to produce until the price is equal to the cost per good, so the producer surplus is the total utility they get from making that many goods.

Again, graphically, this can be seen as the area between the price line and the supply curve. A market is said to be allocatively efficient when the quantity of a good being sold maximizes the total utility of both consumers and producers, which means people are allocating their resources in the most efficient manner.