David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

3.8 Consumer and producer surplus
Government regulations can sometimes be viewed as
imposing a technological change that is adverse for
producers. If so, the effect of regulations will be to shift
the supply curve to the left, reducing quantity supplied
at each price.
More stringent safety regulations prevent chocolate
producers using the most productive process because
it is quite dangerous to workers. Anti-pollution devices
may raise the cost of making cars, and regulations
to protect the environment may make it unprofitable
for firms to extract surface mineral deposits which
could have been cheaply quarried but whose extraction
now requires expensive landscaping. Whenever
regulations prevent producers from selecting the
production methods they would otherwise have chosen,
the effect of regulations is to shift the supply curve to
the left.
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Shifts in the supply curve
Along a given supply curve, we hold constant technology,
the prices of inputs and the extent of government
regulation. Any change in those factors will shift the
supply curve. We now undertake a comparative static
analysis of what happens when a change in one of these
The supply curve initially is SS and market equilibrium
is at E. A reduction in the supply of chocolate shifts the
supply curve to the left to S'S'. The new equilibrium at E'
has a higher equilibrium price and a lower equilibrium
quantity than the old equilibrium at E.
Figure 3.5 A fall in supply
'other things equal' leads to a fall in supply. Suppose tougher safety legislation makes it more expensive to
make chocolate bars in mechanized factories. Figure 3.5 shows a shift to the left in the supply curve, from
SS to S'S'. Equilibrium shifts from E to E'.
The equilibrium price rises but equilibrium quantity falls when the supply curve shifts to the left. Conversely,
a rise in supply shifts the supply curve from S'S' to SS. Equilibrium shifts from E' to E. A rise in supply
induces a higher equilibrium quantity and lower equilibrium price.
C_ o _ n _ su _m_ e _ r a_ n _ d _ p _ ro _ d _ u c_ er _ s _ u r _ p _ l u _ s
In previous sections we defined the market equilibrium. Can we say something about how 'good' a market
equilibrium is? In practice, we want to find a possible measure for the gains that consumers and sellers
obtain from trading at the equilibrium price. For the consumers, this measure of trade gain is called
consumer surplus.
For a single consumer, the consumer surplus is the difference between the maximum price (also called the
reservation price) that she is willing to pay for a given amount of a good or service and the price she actually
pays.
Suppose that you want to buy the latest CD of your favourite artist. You are willing to pay a maximum £15
for it. If the price of the CD at the shop is £8, you buy it, and you can say that from buying it you have
obtained a surplus of £7. This surplus is a measure of your gain from buying the CD.
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