Economic surplus

The term surplus is used in economics for several related quantities. The consumer surplus (sometimes named
consumer's surplus or consumers' surplus) is the amount that consumers benefit by being able to purchase a
product for a price that is less than they would be willing to pay. The producer surplus is the amount that producers
benefit by selling at a market price mechanism that is higher than they would be willing to sell for.
Note that producer surplus generally flows through to the owners of the factors of production: in perfect competition,
no producer surplus accrues to the individual firm. This is the same as saying that economic profit is driven to zero.
Real-world businesses generally own or control some of their inputs, meaning that they receive the producer's surplus
due to them: this is known as normal profit, and is a component of the firm's opportunity costs. If the markets for
factors are perfectly competitive as well, producer surplus ultimately ends up as economic rent to the owners
of scarce inputs such as land.[1]

Overview
On a standard supply and demand (S&D) diagram, consumer surplus (CS) is the triangular area above the price level
and below the demand curve, since intra-marginal consumers are paying less for the item than the maximum that they
would pay. In contrary, producer surplus (PS) is the triangular area below the price level and above the supply curve,
since that is the minimum quantity a producer can produce.
If the government intervenes by implementing, for example, a tax or a subsidy, then the graph of supply and demand
becomes more complicated and will also include an area that represents government surplus.
Combined, the consumer surplus, the producer surplus, and the government surplus (if present) make up the social
surplus or the total surplus. Total surplus is the primary measure used in welfare economics to evaluate the
efficiency of a proposed policy.
A basic technique of bargaining for both parties is to pretend that their surplus is less than it really is: sellers may
argue that the price they ask hardly leaves them any profit, while customers may play down how eager they are to
have the article.
In national accounts, operating surplus is roughly equal to distributed and undistributed pre-tax profit income, net of
depreciation.
In some schools of heterodox economics, the economic surplus denotes the total income which the ruling
class derives from its ownership of scarce factors of production, which is either reinvested or spent on consumption.
In Marxian economics, the term surplus may also refer to surplus value, surplus product and surplus labour.

Consumer surplus
The individual consumer surplus is the difference between the maximum total price a consumer would be willing to
pay (or reservation price) for the amount he buys and the actual total price. If someone is willing to pay more than the
actual price, their benefit in a transaction is how much they saved when they didn't pay that price. For example, a
person is willing to pay a tremendous amount for water since he needs it to survive, however since there are
competing suppliers of water he is able to purchase it for less than he is willing to pay. The difference between the two
prices is the consumer surplus.
The maximum price a consumer would be willing to pay for a given amount is the sum of the maximum price he would
be willing to pay for the first unit, the maximum additional price he would be willing to pay for the second unit, etc.
Typically these prices are decreasing; in that case they are given by the individual demand curve. If these prices are
first increasing and then decreasing there may be a non-zero amount with zero consumer surplus. The consumer
would not buy an amount larger than zero and smaller than this amount because the consumer surplus would be
negative. The maximum additional price a consumer would be willing to pay for each additional unit may also alternate
between high and low, e.g. if he wants an even number of units, such as in the case of tickets he uses in pairs on
dates. The lower values do not show up in the demand curve because they correspond to amounts the consumer
does not buy, regardless of the price. For a given price the consumer buys the amount for which the consumer surplus
is highest.
One bargaining tactic is to pretend a lower consumer surplus.
The aggregate consumers' surplus is the sum of the consumer's surplus for each individual consumer. This can be
represented on the figure of the aggregate demand curve.

Calculation from supply and demand

Where Pmkt is the equilibrium price (where supply equals demand), Q mkt is the total quantity purchased at the
equilibrium price and Pmax is the price at which the quantity purchased would fall to 0 (that is, where the demand
curve intercepts the price axis). For more general demand and supply functions, these areas are not triangles
but can still be found using integral calculus. Consumer surplus is thus the definite integral of the demand
function with respect to price, minus the definite integral of the constant function D(P)=Q mkt (i.e. PmktQmkt), from
the market price to the maximum reservation price (i.e. the price-intercept of the demand function):

The graph shows, that if we see a rise in the equilibrium price and a fall in the equilibrium quantity, then
consumer surplus falls.
Distribution of benefits when price falls
When supply of a good expands, the price falls (assuming the demand curve is downward sloping) and consumer
surplus increases. This benefits two groups of people. Consumers who were already willing to buy at the initial price
benefit from a price reduction; also they may buy more and receive even more consumer surplus, and additional
consumers who were unwilling to buy at the initial price but will buy at the new price and also receive some consumer
surplus.
Consider an example of linear supply and demand curves. For an initial supply curve S 0, consumer surplus is the
triangle above the line formed by price P0 to the demand line (bounded on the left by the price axis and on the top by
the demand line). If supply expands from S0 to S1, the consumers' surplus expands to the triangle above P 1 and below
the demand line (still bounded by the price axis). The change in consumer's surplus is difference in area between the
two triangles, and that is the consumer welfare associated with expansion of supply.
Some people were willing to pay the higher price P0. When the price is reduced, their benefit is the area in the
rectangle formed on the top by P0, on the bottom by P1, on the left by the price axis and on the right by line extending
vertically upwards from Q0.
The second set of beneficiaries is consumers who buy more and new consumers, those who will pay the new lower
price (P1) but not the higher price (P0). Their additional consumption makes up the difference between Q 1 and Q0.
Their consumer surplus is the triangle bounded on the left by the line extending vertically upwards from Q 0, on the
right and top by the demand line, and on the bottom by the line extending horizontally to the right from P 1.

Rule of one-half
The rule of one-half estimates the change in surplus for small changes in supply with a constant demand curve. Note
that in this special case where the consumer demand curve is linear, consumer surplus is the area of a triangle.
Following the figure above,

where:
 CS = Consumers' Surplus
 Q0 and Q1 are the quantity demanded before and after a change in supply
 P0 and P1 are the prices before and after a change in supply