1.2.8 Consumer and Producer Surplus

Consumer Surplus

The additional benefit or utility that consumers receive when they purchase a good or service at a price lower than what they are willing to pay.

Producer Surplus

The additional profit that producers earn when they sell a good or service at a price higher than their minimum acceptable price.

Consumer Surplus on a Supply and Demand Diagram

The triangular area between the demand curve and the actual market price, representing the additional benefit consumers receive from lower prices.

Producer Surplus on a Supply and Demand Diagram

The triangular area between the supply curve and the actual market price, representing the additional profit earned by producers from higher prices.

Increase in Demand

When demand increases, consumers are willing to pay higher prices, leading to an increase in consumer surplus and potentially an increase in producer surplus.

Decrease in Demand

A decrease in demand may result in lower prices, increasing consumer surplus but decreasing producer surplus.

Increase in Supply

An increase in supply often leads to lower prices, increasing consumer surplus but potentially decreasing producer surplus.

Decrease in Supply

A decrease in supply can result in higher prices, decreasing consumer surplus but potentially increasing producer surplus.

Numerical Example

In a market for smartphones, if the market price is $800 and consumers are willing to pay up to $1,000, consumer surplus is ($1,000 - $800) * Quantity sold.