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Home Field Trips Trade Tour Consumer and Producer Surplus

Theories

Consumer and Producer Surplus: Measures of Welfare

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Consumer surplus is a measure of consumer welfare gained by consumers being able to purchase a good or service in the market at a price lower that the maximum that they would be prepared to pay for it rather than going with out it. In the diagram below it is shown by the area of the triangle above the equilibrium price.

Producer surplus is the difference between the revenue that the firms would earn from offering a good or service for sale rather than not selling it and the revenue that they are able to achieve by selling it at the market price. The producer surplus arises because the producer can now sell more than before and/ or at a higher price. The producer surplus is shown in the diagram below by the triangle below the equilibrium price and above the supply curve.

The total welfare gained can be found by adding the consumer and producer surpluses together.

Next theory - Price Elasticity of Demand >>

Related Glossary Items:
Consumer Surplus
Producer Surplus

Related Theories:
The Imposition of Tariffs and Welfare Loss
Price Elasticity of Demand