5.11 Consumer and Producer Surplus

• Consumer Surplus

  • Consumer and producer surplus are both maximised at the free market equilibrium 
  • Consumer Surplus is the difference between the price the consumer is willing and able to pay and the price they actually pay. This is perceived from their private benefit from consuming the good. 
  • It is always above the market price but below the demand curve.
  • Due to the law of diminishing marginal utility, consumer surplus generally declines with extra units consumed. 
  • Inelastic demand curves give a larger consumer surplus.
• Producer Surplus

  • This is the difference between the price the producer is willing to charge and the price they actually charge, this is measured by profit.
  • This is always the area below the market price and above the supply curve.
• Economic Welfare

  • This is the total benefit society receives from an economic transaction.It is calculated by the area of producer surplus and consumer surplus added together.
• Price discrimination and deadweight loss with monopoly

  • Price discrimination occurs in a monopoly, when the monopolist decides to charge different groups of consumers different prices, for the same good or service. This generally results in a loss of consumer welfare. 
  • By charging different prices, the monopolist can maximise their overall profits and producer surplus. 
  • Deadweight loss is the loss of economic efficiency when the equilibrium price and quantity is not achieved.