Question

What is the motivation for calculating consumer surplus, producer surplus, and total surplus?

Assume the equilibrium quantity in a competitive market is 16 and the equilibrium price is 8. Also assume the highest willingness to pay is 14 and the lowest cost is 3.

Calculate the consumer surplus, producer surplus, and total surplus for this market.

Answer 1

Consumer surplus (CS) is the difference between maximum willingness to pay and actual price paid by consumers. Therefore, CS measures the welfare gain to consumers. Producer surplus (PS) is the difference between market price and minimum price acceptable to buyers. Therefore, PS measures the welfare gain to producers. Total surplus (TS) is the sum of CS and PS, therefore TS measures overall gain to society from a particular price-quantity combination.

Using given data,

CS = Area between demand curve & price = (1/2) x (14 - 8) x 16 = 8 x 6 = 14

PS = Area between supply curve & price = (1/2) x (8 - 3) x 16 = 8 x 5 = 40

TS = CS + PS = 14 + 40 = 54