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

CHAPTER 3 Demand, supply and the market
p
P*
Consumer surplus
Supply
Q* Q
The total gain from trading in the market is given by the
sum of the consumer and producer surplus. Here, the
gain from trading at the equilibrium price is depicted.
Figure 3.6 Consumer and producer surplus at
the market equilibrium
We can extend the idea of consumer surplus to all
consumers in a market. In particular, the consumer
surplus is measured by the area below the market
demand curve and above the equilibrium price.
Similarly we can define a measure for the gain sellers
obtain from selling a given quantity of a good or service
at the equilibrium price. We call this gain for sellers the
producer surplus. The producer surplus for sellers is the
amount that sellers benefit by selling at a market price
that is higher than they would be willing to sell for.
Suppose you want to sell an old record of yours on
eBay. You are willing to sell it at a minimum price of
£10. Suppose you end up selling it for £30. Your surplus
from this transaction is £20. Graphically, the producer
surplus is given by the area above the market supply
and below the equilibrium price.
The sum of the consumer and producer surplus in a
market is a measure of the economic surplus that the
participants obtain by trading in the market. This is
shown in Figure 3.6. It should be noticed that the
economic surplus is highest at the equilibrium price.
At any price that is not the equilibrium price, the
economic surplus will be lower.
Graphical derivation of consumer and producer surplus
•
Consider a linear
market demand for
a given good. Suppose that the
equilibrium price that consumers
pay is £ 10 for each unit of the good
and the equilibrium quantity is 10
units. Suppose that consumers are
willing to buy one unit of the good
at a price of £19.50. They are
willing to buy two units of the
good if the price of each unit is
£ 19. They are willing to buy three
units if the unit price if £18.50,
and so on. In the figure on the
right we plot market demand with
the information just described.
The consumers are willing to buy
1 unit of the good at the price of
£19.50; however, they actually pay
£ 10 for each unit of the good.
p
18.50
10
-
I
I
I
------ ------,-
'
I
A
B
Area A = Consumer surplus
on the first unit of the good
c
Area B = Consumer surplus on
the second unit of the good
Area C Consumer surplus
=
on the third unit of the good
-- - - - - - -- - -·-- - --- - - - - -- - - - - - - - - - - --- - - - - - - - - -
2 3 10 Q
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