Question

What is the difference between consumer and producer surplus? How is this calculated?

Answer 1

Consumer surplus refers to the difference between the equilibrium price and maximum price a consumer is willing to pay for a good

Producer surplus refers to the difference between the equilibrium price and the minimum price a producer is willing to accept for a product.

Consider the following simple diagram :

In the above diagram the equilibrium price and quantity is found by the intersection of the supply and demand curve

In this case,the area above the equilibrium price and below the demand curve is the consumer surplus and the area below the equilibrium price and above the supply curve is the producer surplus.

The area of both the triangle would be calculated as: 1/2xbasexheight

where base is the equilibrium quantity = 200 and height is the difference between the prices.

So,for CS=1/2x200x(80-40) = 4000

PS=1/2x200x(40-0) = 4000