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Consumer Surplus

The idea of consumer surplus is what a consumer stands to gain when he or she buys a good at the market price. A demand curve illustrates all points that quantity demanded at each price that a consumer is willing to buy. For example, in (a) Lisa is willing to pay 2 for the 10th slice. since the price of Pizza is $1, she ends up buying it at the market price of $1. This gives Lisa a consumer surplus of $1 [$2 (what she was willing to pay for the slice) – $1 (what she actually paid for the slice)]. Our IB Economics tutor available near London and online prepare specialized tutorial sessions similar to this one.

Lisa’s total consumer surplus is the sum of all consumer surplus from each slice. That is, the area bounded below the demand curve and above the price is Lisa’s consumer surplus.

Nick has a lesser consumer surplus because his demand curve is such that he is not willing to pay as much for Pizza as Lisa. Regardless, Nick still has some consumer surplus.

(C) shows the total market consumer surplus is the sum of consumer surplus of all consumers who participate in the market.

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Producer Surplus

Producer Surplus is the area above the supply curve and below the market price. Graph (a) shows Max’s producer surplus. For 50th pizza per month, the minimum amount Max will charge is 10 but he is able to sell it at 15, which is a surplus of 5 for Max. Thus his total producer surplus is the sum of producer surplus for all pizza that he produces and sells.

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