Consumer & Producer Surplus; The Price Mechanism

Consumer and producer surplus

Consumer surplus is the difference between the maximum price a consumer is willing to pay and the price actually paid — the area below the demand curve and above the price. It measures the welfare gain to buyers.

Producer surplus is the difference between the price a producer receives and the minimum they were willing to accept (their marginal cost) — the area above the supply curve and below the price. It measures the welfare gain to sellers.

A fall in price raises consumer surplus and reduces producer surplus; total economic welfare is maximised at the competitive equilibrium.