What is Consumer Surplus?

Consumer surplus is derived whenever the price a consumer actually pays is less than they are prepared
to pay.

Welfare economics is the study of how the allocation of resources affects economic well-being. Indeed,
the objective of most economic activity is to provide what people most desire. Because people's
disposable income is limited, they must decide what they want and what they are willing to pay.

People vary greatly in their desire for a particular product, which is measured by their willingness to
pay , the maximum amount that a buyer will pay for a good. Some people will not be willing to pay the
market price, so they will do without the product. The amount that a consumer is willing to pay minus
the amount actually paid results in a consumer surplus for the consumer.

Consumer Surplus = Willingness to Pay Price – Market Price

Marginal Buyers

Some people are marginal buyers , whose willingness to pay is equal to the market price. Thus, marginal
buyers do not enjoy a consumer surplus.
Price discrimination and consumer surplus

 Producers often take advantage of consumer surplus when setting prices

 If a business can identify groups of consumers within their market who are willing and
able to pay different prices for the same products, then sellers use price discrimination –
this is a way of turning consumer surplus into producer surplus, put simply to make
higher revenues and profits.

What is Producer Surplus?

In a market of sellers, each will have their own cost of production. A producer is willing to produce a
product if she can receive a price equal to or greater than the economic cost of producing it. Economic
cost not only includes the cost of materials and labor, but also the opportunity cost of the seller's time.
Hence, economic cost includes what economists call a normal profit.

Each seller has a different efficiency of producing a product. because some producers are more efficient
than others, they will make more than just the economic cost of their production. They will earn a
producer surplus, equal to the sale price minus their economic cost of production.

Producer Surplus = Actual Sale Price – Economic Cost

Marginal Seller

No seller is willing to sell for less than his economic cost, and if a seller's economic cost is equal to the
selling price, then he earns no producer surplus, so he is considered a marginal seller.