Chapter 4: Consumer and Producer Surplus

Consumer’s willingness to pay

The maximum price a buyer will pay for a good.

Individual consumer surplus

Difference between what a buyer is willing to pay and what they actually pay.

Total consumer surplus

Sum of all consumer surpluses; area below demand and above price.

Producer surplus

Difference between price received and cost of production.

Individual producer surplus

Net gain to an individual seller; price minus cost.

Total producer surplus

Area above supply and below market price.

Total surplus

Sum of consumer and producer surplus; total gains from trade.

Efficiency of markets

Markets are efficient when total surplus is maximized.

Property rights

Owner’s rights to control, use, and transfer a resource or good.

Economic signal

Information that helps people make better decisions; prices are key signals.

Market failure

Occurs when a market is inefficient and fails to maximize total surplus.

Causes of market failure

Market power, externalities, public goods, and imperfect information.

Q: What does consumer surplus measure?

Benefit consumers receive from paying less than they’re willing to pay.

Q: What does producer surplus measure?

Benefit producers receive from selling above cost.

Q: What does total surplus measure?

Total net benefit to society from production and consumption.