CONSUMER AND PRODUCER
SURPLUS
CONSUMER AND PRODUCER SURPLUS
• Both consumer surplus and producer surplus are
economic terms used to define market wellness by
studying the relationship between the consumers
and suppliers.
• They explain the opportunity cost consumers forego
to gain a marginal benefit for buying a good or
service.
• To the producer, it is the willingness and ability to
produce an extra unit of a product based on the
marginal cost of producing more goods.
CONSUMER AND PRODUCER SURPLUS
CONSUMER AND PRODUCER SURPLUS
• Understanding Consumer Surplus and Producer
Surplus
• When discussing consumer and producer surplus, it
is important to understand some base concepts
used by economists to explain the inter-
relationship.
• Both consumer and producer surplus can be
graphed to display either a demand curve or
marginal benefit curve (MB) and a supply curve or
marginal cost curve (MC).
CONSUMER AND PRODUCER SURPLUS
CONSUMER AND PRODUCER SURPLUS
• Consumer surplus refers to the
monetary gain enjoyed when a
purchaser buys a product for less
than what they normally would be
willing to pay.
• Each corresponding product unit
price along the supply curve is known
as the marginal cost (MC).
CONSUMER AND PRODUCER SURPLUS
CONSUMER AND PRODUCER SURPLUS
• On the other hand, the producer surplus is the price
difference between the lowest cost to supply the
market versus the actual price consumers are willing
to pay.
• The price of a product unit along the supply curve is
known as the marginal cost (MC).
• When graphing consumer surplus, the area above
every extra unit of consumption, is referred to as the
total consumer surplus.
• Similarly, the area above the supply curve for every
extra unit brought to the market is referred to as the
total producer surplus.
CONSUMER AND PRODUCER SURPLUS
• When you add both the consumer and
producer surplus, you get the total surplus, also
known as total welfare or community surplus.
• It is used to determine the well-being of the
market.
• When all factors are constant, in a perfect
market state, an equilibrium is achieved.
• This state is also referred to as allocative
efficiency – the marginal cost and marginal
benefit are equal.
CONSUMER AND PRODUCER SURPLUS
CONSUMER AND PRODUCER SURPLUS
Understanding Consumer Surplus
• To fully conceptualize consumer surplus,
take an example of a demand curve of
chocolates plotted on a graph. The unit
price is plotted on the Y-axis and the
actual chocolate units of demand per day
on the X units. The graph below shows
the consumer surplus when consumers
purchase two units of chocolates.
CONSUMER AND PRODUCER SURPLUS
CONSUMER AND PRODUCER SURPLUS
• Calculating the Total Consumer Surplus
CONSUMER AND PRODUCER SURPLUS
• To calculate consumer surplus, account for Δ0
units. In the graph above, the corresponding unit
price is $14. It is the market price that consumers
are able and willing to purchase a bar of
chocolate.
• Since the demand curve is linear, the shape
formed between Δ0 unit to 2 and below the
demand curve is triangular. Therefore, the
ordinary formula for finding an area of a triangle is
used. The unit items cancel out to leave the result
expressed in monetary form.
CONSUMER AND PRODUCER SURPLUS
Total Consumer Surplus Formula
• Where:
• Qn = Quantity of demand/supply either at
equilibrium or the willing purchasing or selling
price
• ΔP = The difference between the price at
equilibrium or at the purchasing or selling
CONSUMER AND PRODUCER SURPLUS
• Calculating the Total Consumer Surplus
• In summation, the market saves $3 for
the same unit it could’ve purchased for
$14.
CONSUMER AND PRODUCER SURPLUS
CONSUMER AND PRODUCER SURPLUS
• Calculating the Total Producer Surplus
CONSUMER AND PRODUCER SURPLUS
• The producer surplus cost at two units is $4 ($6 –
$2). This means that the supplier(s) will forego $4
per unit for producing two units.
• Total Surplus
• In the previous example, the total consumer
surplus was $3, and the total producer surplus $4,
respectively. The total surplus, therefore, will be
$7 ($3 + $4). Below is the formula:
• Total Surplus = Consumer Surplus + Producer
Surplus
CONSUMER AND PRODUCER SURPLUS
CONSUMER AND PRODUCER SURPLUS
• In the above example, the total surplus does not depict
the equilibrium.
• There is a deadweight to shed off.
• Supplier overheads are higher for producing two units.
• Similarly, the consumer is getting less than what the
market can offer.
• As a result, to achieve a stable market, the producer(s)
must increase the production to reduce the
deadweight and attain the equilibrium.
• At the equilibrium, the consumer(s) will enjoy the
highest marginal utility, and supplier(s) will maximize
profits.
