Concepts Of Consumer Surplus and Producer Surplus

Concepts Of Consumer Surplus and Producer Surplus

CONSUMER SURPLUS

Consumer surplus refers to the difference between the price of goods and services that a consumer is willing to pay and the consumer actually pays.

Example: Suppose I went to a shop to buy a watch. The price of the watch told by the shop keeper is Rs. 1500. But the amount is out of my budget so I started bargaining and decided to pay Rs. 1000 for the watch. So, the consumer price here is Rs. 500 ( Rs. 1500 – Rs. 1000).  

DIAGRAM OF CONSUMER SURPLUS

Here in the diagram the horizontal axis indicates the quantity demand and the vertical axis indicates the price and A and B indicates the demand curve. The shaded portion below the demand curve and above the market price indicates the consumer surplus.

PRODUCER SURPLUS

Producer surplus refers to the difference between the price of goods and services the producer is willing to sell and the price actually sold.

Example: Suppose I am willing to sell a Calculator. The cost of production of the calculator is Rs. 150. And I sold the calculator in the market at a price of Rs. 400. So Rs. 250 (Rs. 400 – Rs. 150) is the Producer Surplus.

DIAGRAM OF PRODUCER SURPLUS:

Here in the diagram the horizontal axis indicates the quantity supply and the vertical axis indicates the price and C and D indicates the supply curve. The shaded portion below the market price and above the supply curve indicates the producer surplus.