Economics: Surpluses, Welfare, and Government Intervention (Lecture Notes)

Consumer surplus and producer surplus in a competitive market

• Key ideas
  • In a competitive market with buyers and sellers, consumer surplus (CS) is the benefit to buyers from paying less than what they are willing to pay; producer surplus (PS) is the benefit to sellers from receiving more than their minimum acceptable price.
  • Area interpretation (for a linear market):
  • CS is the area under the demand curve and above the price level, up to the quantity traded.
  • PS is the area above the supply curve and below the price level, up to the quantity traded.
  • Total welfare (or total surplus) in the market is the sum of CS and PS: W = CS + PS.