3.8 consumer and producer surplus

• Consumer Surplus:

  • Defined as the difference between the maximum price a consumer is willing to pay (reservation price) and the actual price paid.
• If you are willing to pay £30 for a box set but purchase it for £15, your consumer surplus is £15.
• Consumer surplus can be extended to all consumers in a market and is represented graphically by the area under the demand curve and above the equilibrium price.
• Producer Surplus:

  • The difference between the price producers are willing to accept (their minimum price) and the market price they receive.
• Producer surplus is graphically represented by the area above the supply curve and below the equilibrium price.
• Example: If you are willing to sell a vinyl record for £10 but sell it for £30, your producer surplus is £20.
• The sum of consumer and producer surplus is called economic surplus or social surplus.
• Total Economic Surplus:

  is maximised when the market is in equilibrium
• consumer surplus : the difference between the price consumers are willing and able to pay for a good / service & the price they actually pay.
• consumer surplus is the area below the demand curve & above the price line
• producer surplus: the difference between the price producers are willing and able to supply a good / service for and the price they actually receive.
• producer surplus is the area above the supply curve and below the price line