**Table of Content**

## Consumer surplus

Consumer surplus is when a consumer’s willingness to pay for a good or service is higher than the price that they actually paid. So let’s say that you play the guitar and you find this guitar on

**eBay**that you really really want and you’d be willing to pay up to**$800**for this guitar. But you end up in the auction actually getting the guitar the actual price that you pay is**$550.**So you would have paid up to**$800**but it only got bid up to**$550.**You were the winning bidder and so you see here that your willingness to pay exceeds the price that you actually paid. If we were to subtract**$550**from**$800**we would get**$250.**So we would say that you have**$250**of surplus.Now the producer surplus, we’re just thinking about

**the cost of producing the good**deducted from**the amount that the producer receives**. So let’s say that there’s a producer that makes drum kits right so they make drum kits for people to play the drums and stuff for a band. It costs them**$300**to produce a drum kit but they sell the drum kit for**$700.**So now we see that there is a minimum cost that they needed to break even would have been**$300**but they actually get**$700**for the drum kit. We would say that the difference there which you can think about is profit or however you want that is producer surplus of**$400**and so we can actually calculate the consumer surplus and the producer surplus for all the consumers and all the producers in the market.In that example, I just gave the consumer surplus of one person. We just about you buying a guitar on eBay but we could think about all the different consumers and producers in the market and we could calculate the surplus for both of those groups and then if we were to add the

**consumer surplus**and**producer surplus**for everybody then we would have the**total surplus**of basically that’s produced by having transactions occur in the market. Let me give you an example, now again we’re thinking about the whole market, so we’ve got our demand curve, and let’s just say that we’re talking about**Surfboards.**So let’s say that this is the market for surfboards and we’re not just talking about one person’s demand for surfboards we’re talking about everybody. So this demand curve tells us all the different amounts that would be demanded at different prices in the market.Then we’ve got our supply curve that’s the amount that the producers of surfboards are willing to supply at different quantities for different prices. So we’ve got our equilibrium and I’ve got

**a article**on supply and demand if this is new to you but when the supply curve and the demand curve intersect that point is our equilibrium.So in a free market, we have an equilibrium price of

**$800**and our equilibrium quantity is**100,000**products. We can see that at this equilibrium price of**$800,**there were some people in the market who would have been willing to pay more than**$800**to get a surfboard for example right here at**point “A”**

at this point let’s just say that would be a price of

**$1,000.**So there are people who would have paid**$1,000**but they got the surfboard for the equilibrium price of**$800.**Each of them got**$200**of surplus and so how do we calculate all of the consumer surpluses? Because some people would have been willing to pay**$1100**some people would have been willing to pay**$850**etc but no one would have been willing to pay**$1200**or more because we see at a price of**$1200**the quantity demanded is**zero.**Nobody’s demanding anything so all this area hereThis area here is our consumer surplus that triangle is our consumer surplus. So it’s the area below the demand curve but it’s above the price so this whole triangle is our consumer surplus.

## Mathematical Calculation of Consumer Surplus

We can take the area of that, we can actually calculate the number because if we’re thinking about the

**area of a triangle**so we’d say is our consumer surplus it’s going to be equal to**1/2**multiplied by**the base**multiplied by**the height**of the triangle. Our base is going to be that distance between**0 to 100,00**and that’s a**(100,000 – 0)**which is**100,000.**So we’re gonna have 1/2 times**100,000**times the height and the height is just going to be**1200**minus**800**which is**400.**if you multiply all this out you get**$20,000,000**is the consumer surplus.Let’s think about it with the producers, this supply curve we can think of as the minimum supply price. That’s the minimum amount at each point given a certain amount, there’s a certain quantity was the minimum price that the suppliers would demand. So here we want all the points below the price of

**$800**below that price but above the supply curve, this whole area is going to be our producer surplus.## Mathematical Calculation of Producer Surplus

We can calculate the producer surplus because again in this case it’s just a triangle. Throatily in this case just

**1/2**multiplied by**the base**multiplied by**the height**of the triangle. So we’re gonna have**1/2**times the base which is again**100,000**times the difference between the height here of this triangle is**800 minus 400**which is again**$400.**In this case, it just so happens to work out that the producer surplus and the consumer surplus are actually exactly the same

**$20,000,000.**but we’re gonna talk about all kinds of instances where the producer surplus and the consumer surplus are not the same we’re gonna have things like a**quota on imports**or a**tariff**or different things that they’re gonna change where we have maybe transfer some of the consumer surpluses is actually transferred to producers and then we’re gonna have some cases where we lose some value and nobody gets it, well I have a situation where nobody’s getting some section and we’ll call that a**deadweight loss**.So basically if we want to add up the value being created by this market we can add the

**consumer surplus**and the**producer surplus**together we can add these two amounts and that’s**40 million dollars.**So**40 million dollars**is the total surplus. Now, why is this relevant? Why do we even care what the surplus is? Because we can think about things like a**tariff**we can think about different things that a government can do and then we can say how does it affect this surplus. If there’s some kind of government acts like a**price ceiling**or something like that that comes in and takes away some of that surplus then we can think about we’ve lost value as a society and then we can also think about who are the winners and losers of a policy and we’ll talk about all that a lot more in the articales to come.