Consumer and producer surplus
Consumer surplus
- Consumer surplus is the gain to buyers: the difference between the most they would pay and the price they actually pay.
- On a diagram: the area below the demand curve and above the price.
Practice
Consumer surplus is the difference between:
Consumer surplus is the buyer's gain — willingness to pay minus the price paid.
Producer surplus
- Producer surplus is the gain to sellers: the difference between the price received and the lowest they would accept.
- On a diagram: the area above the supply curve and below the price.
Practice
Producer surplus is shown on a diagram as the area:
Producer surplus sits above supply and below the price; consumer surplus is below demand and above price.
Welfare
- Consumer surplus + producer surplus = total welfare (gain to society).
- It is largest at the free-market equilibrium.
- A higher price raises producer surplus but lowers consumer surplus.
Practice
Total welfare (consumer + producer surplus) is largest at the free-market equilibrium.
At equilibrium the combined surplus is maximised.
You've got it
Key idea
- consumer surplus = below demand, above price (buyers' gain)
- producer surplus = above supply, below price (sellers' gain)
- total welfare = both together, largest at equilibrium