consumer and producer surplus

• Consumer Surplus

  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.
• Calculating Consumer Surplus

  1. Consumers pay price P1 and demand a quantity of Q1

  2. Total benefit to the consumer is area 0Q1XY

  3. Consumers pay price P10Q1X

  4. Net gain to the consumer is P1XY, the shaded triangle

  5. This is consumer surplus

  
• Consumer Surplus


  • It 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

  
• 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.
• Calculating Producer Surplus

  It is always the area below the market price and above the supply curve

  
• Supply has shifted to the left, which could be due to higher costs of production

  Causes market price to increase, and consumer surplus decreases from PQR to ABR
• Supply curve shifts from S1 to S2, which could be due to lower average production costs

  Market price decreases and producer surplus increases from ABC to PQS