The difference between the price the consumer is willing and able to pay and the price they actually pay. This is based on what the consumer perceives their private benefit will be from consuming the good.
Consumer surplus is always the area above market price and 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 because consumers are willing to pay a much higher price to consume the good
Producer Surplus
The difference between the price the producer is willing to charge and the price they actually charge. In other words, it is the private benefit gained by the producer that covers their costs, and is measured by profit.
Producer surplus is always the area below the market price and above the supply curve
Economic Welfare
The total benefit society receives from an economic transaction, calculated by the area of producer surplus and consumer surplus added together.
Economic welfare is important when considering the effects of government policies, which could affect either producer or consumer surplus
