Consumer Surplus and Producer Surplus

Consumer Surplus Meaning and Explanations

Consumer surplus is the difference between what consumers are willing to pay for a product and the actual market price they are paying. It is measured in monetary value in economics. The payment made will always be lower than the price they would have otherwise paid.

It is equal to the degree of extra utility derived by the consumer for which he has not paid any money or value.

So, consumer surplus is an extra advantage gained or money saved by the consumer. 

It is a measurement of the extra satisfaction the consumer derives from that product. 

Here, the consumer does not mind paying an increased price for that product, because he derives much more satisfaction from it than he is actually paying to procure it.

For example, a consumer goes to the market to purchase sugar expecting the price to be Rs.50 per kg. But when he actually purchases it, he finds that he is charged only Rs. 35 per kg. So, it is assumed that the consumer has derived a surplus satisfaction of Rs.15 which is his consumer surplus.

• Buyers always think in terms of the extra satisfaction they derive whenever buying goods. 
• They always look for products that provide higher satisfaction and then bargain to pay a much lower price than the actual utility they derive.
• So, generally, consumers always enjoy some amount of consumer surplus from most of their purchases.
• So, when prices increase, consumer surplus decreases, and when prices fall, consumer surplus increases.

Graphically, consumer surplus can be described as the area below the demand curve and above the price line if you colour that portion in the bottom graph.

Producer Surplus Meaning and Explanations

Just like consumers enjoy surplus satisfaction from their purchases, the producers of a product or the suppliers of it also enjoy extra benefits. 

It is equal to the extra income they get by selling goods at a price higher than what they would otherwise have been forced to sell. 

• The producers may be willing to sell their products at a lower price than the current market price in order to carry on their business rather than wind up. 
• But, by selling their goods at the current market price, they are enjoying extra income. 
• This extra amount of income that they are receiving by selling the product at the current market price (say 'x') instead of selling it otherwise at a lower price (say 'y') is their surplus. 
• So they are enjoying a producer surplus of (x-y) amount multiplied by the quantity sold. 
• This money is their "producer surplus". 

The above is illustrated in the graph below.

The blue line indicates the demand curve. The red line indicates the supply curve.

Both lines intersect at a point where the price level is Rs.500, at the Price-3 point. This is the point where demand and supply are equal.

If you draw a line from the intersection point to the Y-axis (a vertical line), the consumer surplus will be equal to the total satisfaction he enjoys along this line up to the tip of the demand curve at Rs.1000.

Similarly, the producer surplus will be equal to the total satisfaction between the lines at the price level of 500 and the price level 200 above the supply curve. 

(I was unable to shade these portions with a color to make them clear for you.)

Graph for Consumer Surplus and Producer Surplus

(View it in an enlarged size for a clear view.)

I hope you are clear now about the concepts of Consumer Surplus and Producer Surplus. You may clear any doubts by asking in the comments section.