Understanding Consumer and Producer Surplus in Markets

Consumer Surplus

Difference between market price and what consumers would be willing to pay.

Producer Surplus

Difference between market price and the price at which firms are willing to supply the product.

Willingness To Pay

Maximum price at which one would buy a good, usually declines as additional units are purchased.

Individual Consumer Surplus

Net gain to an individual consumer from buying a good, calculated as WTP - Price.

Total Consumer Surplus

Sum of the individual consumer surpluses of all buyers in a market.

Cost

Value of everything a seller must give up to produce a good, including resources and time.

Individual Producer Surplus

Net gain to an individual seller from selling a good, calculated as Price - Seller’s Cost.

Total Producer Surplus

Sum of the individual producer surpluses of all sellers in a market.

Total Surplus

Total surplus in a market, which equals Consumer Surplus + Producer Surplus.

Efficiency

Maximizing total surplus to make it as large as possible.

Equity

Fair distribution of surplus, which is hard to evaluate.

Efficiency of Markets

Allocates consumption to buyers who most value it and sales to potential sellers who value selling the good the most.

Property Rights

Rights of owners to dispose of valuable items as they choose.

Economic Signal

Any piece of information that helps people make better economic decisions.

Market Power

Ability of a single buyer or seller to influence the market.

Total Surplus Formula

Total Surplus = Value to Buyers - Cost to Sellers.