1.2.8 Consumer and producer surplus

Consumer surplus (CS) is the difference between what consumers are willing to pay and what they actually pay for a good / service.

Producer surplus (PS) is the difference between the price firms are willing to sell for and the actual price they receive for a good / service.

Contents

Diagram for consumer surplus and producer surplus

On a diagram:

• Consumer surplus (CS) is the area between the demand curve and the market price (p).
  • The demand curve shows how much consumers are willing to pay for the good.
  • However what consumers actually pay is the market price p.
  • The difference between the demand curve and the market price p therefore shows the consumer surplus This is the orange area in the diagram below.
• Producer surplus is the area between the supply curve and the market price (p).
  • The supply curve shows the price at which firms are willing to produce various quantities of the good.
  • The firms actually receive the market price p for each unit produced.
  • The area between the supply curve and the market price p therefore shows the producer surplus. This is the light blue area in the diagram below.

What determines the level of consumer and producer surplus?

The positions of the supply and demand curves determine the level of consumer and producer surplus.

If supply shifts right, CS and PS rise. This also occurs if demand shifts right.

If supply shifts left, CS and PS fall. This also occurs if demand shifts left.

An example – how demand shifting left affects consumer and producer surplus

In this diagram below, demand shifts left from D to D1.

• So quantity falls from q to q1 and price falls from p to p1.
• Producer surplus (PS) falls from AEp to AFp1.
  • Therefore, the change in PS is pEFp1. This is the area shaded in blue.
• Consumer surplus (CS) falls from CEp to BFp1.
  • After the shift left in demand, the new CS triangle has a smaller base and reduced height, compared to the original CS triangle.

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