Unit 2: Consumer
Choice, Demand,
and Supply
Lecture #5:
Consumer and Producer Surplus
CONSUMER SURPLUS
• The difference between the maximum price a
consumer is willing to pay for a product and
the actual price.
• It measures the buyer’s “economic welfare”
or value for the good.
• Lower prices increase CS
USING THE DEMAND CURVE TO
MEASURE CONSUMER SURPLUS
• The area below the demand curve and above
the price measures the consumer surplus in the
market.
• Can use the formulas for area to calculate…
Triangle 𝐶𝑆 =
1
2
𝑏ℎ
Rectangle 𝐶𝑆 = 𝑏ℎ
Table 1 Four Possible Buyers’ Willingness to Pay
Copyright©2004 South-Western
The Demand Schedule and the
Demand Curve
Figure 1 The Demand Schedule and the Demand Curve
Price of
Album
John’s willingness to pay
$100
Paul’s willingness to pay
80
George’s willingness to pay
70
Ringo’s willingness to pay
50
Demand
0
1
2
3
4
Quantity of
Albums
Copyright©2003 Southwestern/Thomson Learning
Figure 2 Measuring Consumer Surplus with the Demand Curve
(a) Price = $80
Price of
Album
$100
John’s consumer surplus ($20)
80
70
50
Demand
0
1
2
3
4
Quantity of
Albums
Copyright©2003 Southwestern/Thomson Learning
Figure 2 Measuring Consumer Surplus with the Demand Curve
(b) Price = $70
Price of
Album
$100
John’s consumer surplus ($30)
80
Paul’s consumer
surplus ($10)
70
50
Total
consumer
surplus ($40)
Demand
0
1
2
3
4 Quantity of
Albums
Copyright©2003 Southwestern/Thomson Learning
Figure 3 How the Price Affects Consumer Surplus
(a) Consumer Surplus at Price P
Price
A
Consumer
surplus
P1
B
C
Demand
0
Q1
Quantity
Copyright©2003 Southwestern/Thomson Learning
Figure 3 How the Price Affects Consumer Surplus
(b) Consumer Surplus at Price P
Price
A
Initial
consumer
surplus
P1
P2
0
C
B
Consumer surplus
to new consumers
F
D
E
Additional consumer
surplus to initial
consumers
Q1
Demand
Q2
Quantity
Copyright©2003 Southwestern/Thomson Learning
CONSUMER SURPLUS
PRODUCER SURPLUS
• The difference between the actual price a
producer receives and the minimum
acceptable price
• It measures the benefit to sellers participating
in a market.
• Higher prices increase PS
Table 2 The Costs of Four Possible Sellers
Copyright©2004 South-Western
The Supply Schedule and the Supply
Curve
Figure 4 The Supply Schedule and the Supply Curve
USING THE SUPPLY CURVE TO
MEASURE PRODUCER SURPLUS
• The area below the price and above the supply curve
measures the producer surplus in a market.
• Can use the formulas for area to calculate…
Triangle
𝑃𝑆 =
1
2
𝑏ℎ
Rectangle 𝑃𝑆 = 𝑏ℎ
Figure 5 Measuring Producer Surplus with the Supply Curve
(a) Price = $600
Price of
House
Painting
Supply
$900
800
600
500
Grandma’s producer
surplus ($100)
0
1
2
3
4
Quantity of
Houses Painted
Copyright©2003 Southwestern/Thomson Learning
Figure 5 Measuring Producer Surplus with the Supply Curve
(b) Price = $800
Price of
House
Painting
$900
Supply
Total
producer
surplus ($500)
800
600
Georgia’s producer
surplus ($200)
500
Grandma’s producer
surplus ($300)
0
1
2
3
4
Quantity of
Houses Painted
Copyright©2003 Southwestern/Thomson Learning
Figure 6 How the Price Affects Producer Surplus
(a) Producer Surplus at Price P
Price
Supply
P1
B
Producer
surplus
C
A
0
Q1
Quantity
Copyright©2003 Southwestern/Thomson Learning
Figure 6 How the Price Affects Producer Surplus
(b) Producer Surplus at Price P
Price
Supply
Additional producer
surplus to initial
producers
P2
P1
D
E
F
B
Initial
producer
surplus
C
Producer surplus
to new producers
A
0
Q1
Q2
Quantity
Copyright©2003 Southwestern/Thomson Learning
Figure 7 Consumer and Producer Surplus in the Market
Equilibrium
Price A
D
Supply
Consumer
surplus
Equilibrium
price
E
Producer
surplus
B
Demand
C
0
Equilibrium
quantity
Quantity
Copyright©2003 Southwestern/Thomson Learning
PRODUCER SURPLUS
MARKET ALLOCATIVE
EFFICIENCY
Total Surplus (CS+ PS) is maximized
Maximum Willingness to Pay = Minimum Acceptable Price
Marginal Benefits = Marginal Costs
MARKET EFFICIENCY
• Three Insights Concerning Market Outcomes
• Free markets allocate the supply of goods to the buyers
who value them most highly, as measured by their
willingness to pay.
• Free markets allocate the demand for goods to the sellers
who can produce them at least cost.
• Free markets produce the quantity of goods that
maximizes the sum of consumer and producer surplus.
Figure 8 The Efficiency of the Equilibrium Quantity
Price
Supply
Value
to
buyers
Cost
to
sellers
Cost
to
sellers
0
Value
to
buyers
Equilibrium
quantity
Value to buyers is greater
than cost to sellers.
Demand
Quantity
Value to buyers is less
than cost to sellers.
Copyright©2003 Southwestern/Thomson Learning
LOSS OF EFFICIENCY
• Reduction of combined CS and PS due to inefficient
use of resources
• Can be caused by a Price Ceilings or Price Floors
• Known as Deadweight Loss
Deadweight Loss with Price Floor