Consumer & Producer Surplus
Economics: IB Diploma, topic 1.1.6
Consumer & Producer Surplus
Consumer and producer surplus is the benefit that goes to different economic agents as a result of buying and selling goods in the market.
Consumer surplus
- The demand line represents the value that consumers place on a particular good or service.
- At the market price each consumer who values the good or service at or above that price will buy and consume it. A number of consumers value the good or service above the market price and gain utility from the good compared to keeping the money they paid for it.
- The sum of all the extra benefit consumers in a market get from buying and consuming a good or service is the consumer surplus.
Producer surplus
- The supply line represents the cost of producing a good or service.
- At the market price, firms who can produce the good or service at or below the market price will supply it to the market.
- The sum of the extra money earned above the cost of production is the producer surplus.
Total surplus
- Total surplus is the producer surplus plus the consumer surplus. Total surplus is the total benefit to society of economic agents buying and selling a particular good or service.
- If the market isn't at the market clearing equilibrium there is a deadweight loss. This is because there is an extra possible benefit to society which isn't being generated due to over or under production and consumption.
Test yourself on Consumer & Producer Surplus
What is the name of the red area?
What is the name of the blue area?
What does this definition describe?
The sum of all the extra benefit consumers in a market get from buying and consuming a good or service.