AS Economics Notes

2.4 CONSUMER SURPLUS & PRODUCER SURPLUS

Consumer Surplus

Consumer surplus is the difference between the highest price consumers are willing to pay for a good and the actual price they pay.
In a competitive market, the actual price paid is determined by the market equilibrium, which is the point where supply and demand intersect.
Figure 2.41 show the are of consumer surplus. all the consumers who were willing to pay a higher price than Pe to get the good received some benefit over and above what they actually paid for the good. This extra benefit is called consumer surplus.

Producer Surplus

Producer surplus is the difference between the price received by firms for selling a good and the lowest price they are willing to accept to produce it.
Producer surplus is the area above the firm's supply curve and below the price received by firms (Pe) in the market as shown in Figure 2.42
It represents the additional profit gained by firms above their willingness to accept a lower price.

Maximum Social Surplus and Allocative Efficiency

At market equilibrium, the combined consumer and producer surplus is maximized.
Producing a quantity lower than the equilibrium quantity would result in a smaller sum of consumer and producer surplus.
The sum of consumer and producer surplus is also referred to as social surplus or community surplus.
Social surplus is at its maximum when the market reaches its competitive equilibrium point.