What this lesson teaches
I can work out how shifts in demand or supply change price, quantity, spending, revenue, consumer surplus and producer surplus.
Syllabus 9570, 2.1.2(f). Demand and Supply Analysis and its Applications: Changes in demand and supply can affect equilibrium price and quantity, consumer expenditure, producer revenue, consumer surplus and producer surplus
Make a guess
You would pay up to $12 for a concert T-shirt, and you buy it for $8. What did you gain?
- $4 of consumer surplus.
- $8, the amount you paid for the shirt.
- Nothing, because you spent $8.
Show the answer
$4 of consumer surplus.
Consumer surplus is the gap between what you would pay and what you pay: $12 - $8 = $4.
Consumer surplus is what buyers gain from paying less than they would; producer surplus is what sellers gain.
Consumer surplus is the difference between what buyers are willing to pay and what they actually pay. If you would pay $8 for a notebook but pay $5, your consumer surplus is $3.
Producer surplus is the difference between the price sellers receive and the lowest price they would accept. If the seller would accept $3 and receives $5, producer surplus is $2.
On a diagram, consumer surplus is the area below the demand curve and above the price. Producer surplus is the area above the supply curve and below the price, up to the quantity traded.
Producer surplus is not profit. Profit also subtracts fixed costs.
- Consumer surplus
- Willingness to pay minus price paid.
- Producer surplus
- Price received minus lowest acceptable price.
- On the diagram
- CS: below D, above P. PS: above S, below P.
Worked example: One notebook, three numbers
A buyer would pay up to $8 for a notebook. The seller would accept as little as $3. They trade at $5.
- Consumer surplus: $8 - $5 = $3.
- Producer surplus: $5 - $3 = $2.
- Total gain from this trade: $3 + $2 = $5, the gap between $8 and $3.
Watch out for this
Producer surplus means the stock sellers have left unsold.
Unsold stock is a surplus in the sense of excess supply. Producer surplus is the gain sellers make from selling above their minimum price.
Check your understanding
A buyer would pay up to $10. The seller would accept $4. They trade at $7. What are consumer and producer surplus?
- Consumer surplus $7, producer surplus $4.
- Consumer surplus $3, producer surplus $3.
- Consumer surplus $6, producer surplus $0.
Show the answer
Consumer surplus $3, producer surplus $3.
Right. $10 - $7 = $3 for the buyer and $7 - $4 = $3 for the seller.