Understanding Consumer and Producer Surplus

Consumer Surplus (CS)

the value created for consumers, calculated as the difference between the willingness to pay (marginal benefit) and the actual price paid.

Maximization of Consumer Surplus

when consumers pay the lowest possible price for a good relative to their willingness to pay.

Effect of Price Decrease on Total Consumer Surplus

increases as prices decrease, as shown by the larger area under the demand curve above the market price.

Producer Surplus (PS)

is the net benefit for producers, calculated as the difference between the price received (P) and the marginal cost (MC).

Effect of Government Price Ceiling on Surplus

A price ceiling reduces producer surplus and can increase consumer surplus temporarily. However, it often creates deadweight loss and market shortages.