Producer Surplus

Business Calculus · Axiom Academy

LESSON Consumer and Producer Surplus Measuring economic benefit through integration In a market, both buyers and sellers typically benefit from transactions. Surplus measures this benefit - the difference between what parties would be willing to pay/accept and what they actually pay/receive. The benefit buyers receive from paying less than they were willing to pay. "I would have paid 50, but only paid 30!" The benefit sellers receive from selling above their minimum acceptable price. "I would have sold for 20, but got 30!" Total Surplus = Consumer Surplus + Producer Surplus. This measures the total benefit to society from market transactions. Demand curve D(q): Maximum price consumers will pay for each unit Supply curve S(q): Minimum price producers will accept for each unit Equilibrium (q*, p*): Where supply meets demand Blue area: Consumer surplus (above price, below demand) Green area: Producer surplus (below price, above supply) Area between demand curve and market price Area between market price and supply curve Consumer Surplus: D(q) is what consumers would pay; p* is what they do pay. The difference, integrated over all units, is total consumer benefit. Producer Surplus: p* is what producers receive; S(q) is the minimum they'd accept. The difference, integrated over all units, is total producer benefit. Demand: D(q) = 100 - 2q (price consumers will pay) Supply: S(q) = 20 + q (price producers require)

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