Consumer & Producer Surplus

Quick revise

Consumer surplus

This is the difference between what a person would be willing to pay and what they actually pay to buy a product..

It is the area below the demand curve and above the price.The consumer surplus is shown by the shaded area on the diagram.

At a price P1 all consumers in the shaded area would pay more for the good and therefore they gain extra benefits from the lower price

consumer surplus

Producer surplus

This is the difference between the price where a producer would be willing to provide a product and the actual price the product is sold at

Producer / Consumer Surplus & Efficiency

If the market is perfectly competitive at equilibrium price and quantity consumer and producer surplus will be maximised. This represents the most efficient output level

Price Discrimination & Producer / Consumer Surplus

If first degree price discrimination occurs then the consumer surplus is removed and transferred to producer surplus. Other forms of price discrimination also reduce the consumer surplus and increase the producer surplus.

Consumer Surplus and Monopoly

In Monopolies the consumer surplus is reduced. Some of this reduction is passed to producers in the form of the producer surplus.