Consumer Surplus
Consumer Surplus measures the additional benefit consumers receive when they buy a good and pay less for it than they were willing to pay. This is the area just under the Demand curve and above the market price, where the two bounds represent what consumers are willing to pay and what they actually pay, respectively.
Note: Remember, the consumer is already getting the good, and that, in and of itself, is already pretty great. In our example, eating that yummy deliciousness is, in and of itself already fantastic, a goodness that is augmented by the fact if you pay for it less than you were willing to pay. That’s for sure extra happiness!
An Example
Imagine it’s a sunny, torrid day here in Phoenix. It’s so hot and you’re so hungry that all you can think about is ice cream. Indeed, you are willing to pay $4 for that cool deliciousness. But, when you get to the store, you find you have to pay just $2.50. Oh man, are you happy!
So, if you buy one ice cream at a price of $2.50 per ice cream, your consumer surplus is $4.00 – $2.50 = $1.50, that is the amount that you were willing to pay in excess of what you actually did. If you buy two ice creams, your surplus is 2 x $1.50 = $3.00. You get the idea.
Now you try
Fill in the blanks with what will happen to your consumer surplus if, ceteris paribus…
| Price increases: __________ | Price decreases: __________ |
| Buy more ice cream: __________ | Buy less ice cream: __________ |
| Willing to pay more: __________ | Willing to pay less: __________ |
(confirm your answers at the bottom)
Producer Surplus
This number measures the additional benefit producers receive when they sell a good and receive more than they were willing to sell it for. This is the area just above the Supply curve and below the market price where the two bounds represent what producers are willing to sell the good at and what they actually get paid, respectively.
An Example
Imagine it’s a sunny, torrid day here in Phoenix. It’s so hot, you expect many people will be dying for some nice, cool, refreshing lemonade. The entrepreneur in you has an idea! You go to your local supermarket and buy lemons, sugar, nice water… you could be working part-time, so you factor that in as well. All things considered, you are willing to sell your expertly prepared lemonade for $1.50 a glass. As you are setting up, someone walks by and offers you $3.00 for a glass of your lemonade, it looks that yummy. You are so happy you don’t even tell them you’d be willing to sell it for less (I’m not telling anyone either).
So, if you sell one glass of lemonade at a price of $3.00 per glass, your producer surplus is $3.00 – $1.50 = $1.50, that is the amount that you received in excess of what you were willing to sell the lemonade for. If you sell two glasses at that price, your surplus is 2 x $1.50 = $3.00, and so on.
Now you try
Fill in the blanks with what will happen to your producer surplus if, ceteris paribus…
| Price increases: __________ | Price decreases: __________ |
| Sell more lemonade: __________ | Sell less lemonade: __________ |
| Willing to charge more: __________ | Willing to charge less: __________ |
(confirm your answers at the bottom)
Answers
Your consumer surplus would increase, ceteris paribus, the more ice cream you bought, the less you paid per ice cream, and the more you were willing to pay.
Your producer surplus would increase, ceteris paribus, the more glasses you sold, the more your consumers paid for each glass, and the less you were willing to sell your lemonade for.
Joana Girante 