International Trade - Theory and Policy, 2010a

the change in consumer surplus is determined as the area between the price that prevails before, the price
that prevails after, and the demand curve. In this case, consumer surplus rises because the price falls. Two
groups of consumers are affected. Consumers who would have purchased the product even at the higher
price, P 1 , now receive more surplus (P 1 − P 2 ) for each unit they purchase. These extra benefits are
represented by the rectangular area a in the diagram. Also, there are additional consumers who were
unwilling to purchase the product at price P 1 but are now willing to purchase at the price P 2 . Their
consumer surplus is given by the triangular area b in the diagram.
Figure 7.8 Depicting a Change in Consumer Surplus
Producer Surplus
Producer surplus is used to measure the welfare of a group of firms that sell a particular product at a
particular price. Producer surplus is defined as the difference between what producers actually receive when
selling a product and the amount they would be willing to accept for a unit of the good. Firms’ willingness
to accept payments can be read from a market supply curve for a product. The market supply curve shows
the quantity of the good that firms would supply at each and every price that might prevail. Read the other
way, the supply curve tells us the minimum price that producers would be willing to accept for any
quantity demanded by the market.
A graphical representation of producer surplus can be derived by considering the following exercise.
Suppose that only one unit of a good is demanded in a market. As shown in Figure 7.9 "Calculating Producer
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