Economics Notes: Consumer and Producer Surplus

Consumer Surplus

  • Definition: Consumer surplus is the difference between what consumers are willing to pay for a good or service and what they actually pay.
Example with Amazon's Lightning Deal
  • Amazon offers a new tablet at a sales price of $150 (original price not listed, but $150 is noted as less than half).
  • Willingness to Pay (WTP) of five college students:
    • Anthony: $500
    • Amanda: $400
    • Lily: $300
    • Francisco: $200
    • Max: $100
Calculation of Total Consumer Surplus at $150

  • Students who buy at $150:

    • Anthony: $500 - $150 = $350
    • Amanda: $400 - $150 = $250
    • Lily: $300 - $150 = $150
    • Francisco: $200 - $150 = $50
    • Max: $0 (does not buy)

  • Total Consumer Surplus:

    • Formula: $350 + $250 + $150 + $50 + $0 = $800
Effect of Price Increase on Consumer Surplus

  • New Price: Increase from $150 to $350.

  • Students who buy at $350:

    • Anthony: $500 - $350 = $150
    • Amanda: $400 - $350 = $50
    • Lily, Francisco, Max: $0 (do not buy)

  • New Total Consumer Surplus:

    • Formula: $150 + $50 + $0 + $0 + $0 = $200

  • Change in Total Consumer Surplus:

    • Calculation: $800 (original) - $200 (new) = $600 reduction.

Producer Surplus

  • Definition: Producer surplus is the difference between what producers are willing to accept for a good or service (the minimum they would accept) and what they actually receive.
Figure Analysis: Producer Surplus in the Market for Baseballs
  • Understand the relationship between price and producer surplus using the given figure.

  1. At Price P1:

    • Producer Surplus Area: Triangle 0KP1.

  2. At Price P2:

    • Producer Surplus Area: Triangle 0MP2.

  3. Change in Producer Surplus (when price changes from P1 to P2):

    • Change Area: Trapezoid MK P1P2 (shows the increase or decrease in producer surplus as a result of the price change).