1.2.8 Producer & Consumer Surplus

• Consumer surplus is the difference between the amount the consumer is willing to pay for a product and the price they have actually paid
  • For example, if a consumer is willing to pay £18 to watch a movie and the price is £15, their consumer surplus is £3
    
    
• Producer surplus is the difference between the amount that the producer is willing to sell a product for and the price they actually do
  • For example, if a producer is willing to sell a laptop for £450 and the price is £595, their producer surplus is £145

A market diagram illustrating consumer and producer surplus

Diagram Analysis

• The area between the equilibrium price and the demand curve represents the consumer surplus in the market (ABP_e)
  • The consumer surplus lies underneath the demand curve
• The area between the equilibrium price and the supply curve represents the producer surplus in the market (CBP_e)
  • Producer surplus lies above the supply curve
• When the market is at equilibrium the producer and consumer surplus are maximised
• Consumer surplus + producer surplus = social/community surplus
  • Any disequilibrium reduces the social surplus
    
    

• Any change to the condition of supply or demand will cause a shift in the relevant curve
• This shift will change the consumer and producer surplus in the market

An Increase in Supply

The condition of supply has changed and the diagram on the left shows the resulting change to consumer surplus while the diagram on the right shows the change to producer surplus

Diagram Analysis

• Prior to the change in the condition of supply
  • Consumer surplus was equivalent to ACE and producer surplus was equivalent to ACF
  • Social surplus was equivalent to ECF
• After the change, supply increased S₁→S₂
  • Consumer surplus was equivalent to BED and producer surplus was equivalent to BDG
  • Social surplus was equivalent to DEG
• Both the consumer surplus and producer surplus have increased as a result of the increased supply in the market

An Increase in Demand

The condition of demand has changed and the diagram on the left shows the resulting change to producer surplus while the diagram on the right shows the change to consumer surplus

Diagram Analysis

• Prior to the change in the condition of demand
  • Producer surplus was equivalent to ACE and consumer surplus was equivalent to ACF
  • Social surplus was equivalent to ECF
• After the change, demand increased D₁→D₂
  • Producer surplus was equivalent to BED and consumer surplus was equivalent to BDG
  • Social surplus was equivalent to DEG
• Both the producer surplus and consumer surplus have increased as a result of the increased demand in the market