Section 6.

2 Applications in Business and Economics (continued)

Producers’ and Consumer’s Surplus

In economics, the law of demand states:
“As price of a good increases, the quantity demanded of the good falls, and
as the price of the good decreases, the quantity demanded of the good rises.”

The relationship between the price of a good and its respective quantity
demanded can be modeled by a function, say

p = D(x)

where p is the price of the good when x units of the good is demanded. We
call the function p = D(x) the price-demand equation for the particular
good. According to the law of demand, the price-demand equation is a de-
creasing function.

To illustrate how to interpret the price-demand equation, we consider this

example. Suppose the price-demand equation for a particular brand of tooth-
paste is
p = D(x) = 12 − 0.6x dollars per unit.
If the current price (market price) of this toothpaste is $12 per unit, then
consumers are not willing to buy this toothpaste. That is, if p = 12, then

12 = 12 − 0.6x
0.6x = 0
x = 0.

Consumers are no longer willing to buy 20 or more units of the toothpaste.

That is, if x = 20, then

p = D(20)
p = 12 − 0.6(20)
p = 0.

1
The figure below is the graph of p = D(x) = 12 − 0.6x where the domain is
0 ≤ x ≤ 20.

Now, suppose the current price is p̄ = $6 per unit. According to the price-
demand equation:
6 = 12 − 0.6x
0.6x = 6
x = 10
the current demand should be x̄ = 10 units. That is, consumers are willing
to buy 10 units of this toothpaste at the price of $6 per unit. If a consumer
bought 10 units at $6 per unit, how much did the consumer save?

We will answer this question by looking at each unit individually. For the
succeeding arguments, you can refer to the figure on page 3. The first unit
was bought at $6, but the consumer is willing to pay D(1) = 11.4 dollars.
There is a savings of
D(1) − p̄ = 11.4 − 6 = 5.4 dollars.
The second unit was bought at $6 also, but the consumer is willing to pay
D(2) = 10.8 dollars. There is an additional savings of
D(2) − p̄ = 10.8 − 6 = 4.8 dollars.

2
In general, at each value of x on the interval [0, x̄], there is a savings of

D(x) − p̄.

Adding all the savings D(x) − p̄ for all values of x from 0 to x̄, we get
the consumer’s total savings. This total savings is called the consumers’
surplus and is given by Z x̄
[D(x) − p̄] dx.
0

3
To summarize, we have the following definition.

DEFINITION Consumers’ Surplus

If (x̄, p̄) is a point on the graph of the price-demand equation

p = D(x) for a particular product, then the consumers’ surplus
(CS) at a price level of p̄ is
Z x̄
CS = [D(x) − p̄] dx
0

which is the area between p = p̄ and p = D(x) from x = 0 to x = x̄,

as shown in the previous figure.

The consumers’ surplus represents the total savings to consumers who

are willing to pay more than p̄ for the product but are still able to
buy the product for p̄.

So, how much did the consumer in the toothpaste problem save?

Example 1: Find the consumers’ surplus at a price level of $6 for the price-
demand equation
p = D(x) = 12 − 0.6x.

Solution: Find x̄, the demand when the price is p̄ = 6:

p̄ = 12 − 0.6x̄
6 = 12 − 0.6x̄
0.6x̄ = 6
x̄ = 10

4
Computing for the consumer’s surplus:
Z x̄
CS = [D(x) − p̄] dx
0

Z 10
= [(12 − 0.6x) − 6] dx
0

Z 10
= (6 − 0.6x) dx
0

  10 2
= 6x − 0.3x 
0

= [6(10) − 0.3(10)2 ] − [6(0) − 0.3(0)2 ]

= $30

The total savings to consumers who are able to buy 10 units of toothpaste
is $30.

Try this out!

Exercise 1:

1. Find the consumers’ surplus at a price level of p̄ = $150 for the price-
demand equation
p = D(x) = 400 − 0.05x.

2. Find the consumers’ surplus at a price level of p̄ = $15 for the price-
demand equation
p = D(x) = 25 − 0.004x2 .

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This time, we will look at the problem in the perspective of the producers.
The law of supply states:
“As price of a good increases, the quantity of the good supplied rises, and as
the price of the good decreases, the quantity of the good supplied falls.”

The relationship between the price of a good and its respective quantity
supplied can be modeled by a function, say

p = S(x)

where p is the price of the good when x units of the good is supplied. We call
the function p = S(x) the price-supply equation for the particular good.
According to the law of supply, the price-supply equation is an increasing
function.

To illustrate how to interpret the price-supply equation, we consider this

example. Suppose the price-supply equation for a particular brand of tooth-
paste is
p = S(x) = 0.03x2 + 3 dollars per unit.
If the current price (market price) of this toothpaste is $3 per unit or less,
then producers are not willing to sell this toothpaste. That is, if p = 3, then

3 = 0.03x2 + 3
−0.03x2 = 0
x2 = 0
x = 0.

If the current price is $15 per unit, then producers are willing to sell 20 units
of this toothpaste. That is, if p = 15, then

15 = 0.03x2 + 3
−0.03x2 = −12
x2 = 400
x = ±20
x = 20 (since x ≥ 0).

The only limit to how many units producers can sell is their production
process. Hence, the domain of our price-supply equation is x ≥ 0.

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The figure below is the graph of p = S(x) = 0.03x2 + 3 where x ≥ 0.

Now, suppose the current price is p̄ = $6 per unit. According to the price-
supply equation:
6 = 0.03x2 + 3
−0.03x2 = −3
x = 100
x = 10,
the current supply should be x̄ = 10 units. That is, producers are willing to
sell 10 units of this toothpaste at the price of $6 per unit. If a producer sold
10 units at $6 per unit, how much did the producer gain?

We will answer this question by looking at each unit individually. For the
succeeding arguments, you can refer to the figure on page 8. The first unit
was sold at $6, but the producer is willing to sell it at S(1) = 3.03 dollars.
There is a gain of
p̄ − S(1) = 6 − 3.03 = 2.97 dollars.
The second unit was sold at $6 also, but the producer is willing to sell it at
S(2) = 3.12 dollars. There is an additional gain of
p̄ − S(2) = 6 − 3.12 = 2.88 dollars.

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In general, at each value of x on the interval [0, x̄], there is a gain of

p̄ − S(x).

Adding all the gains p̄ − S(x) for all values of x from 0 to x̄, we get the
producer’s total gain. This total gain is called the producers’ surplus and
is given by Z x̄
[p̄ − S(x)] dx.
0

8
To summarize, we have the following definition.

DEFINITION Producers’ Surplus

If (x̄, p̄) is a point on the graph of the price-supply equation

p = S(x) for a particular product, then the producers’ surplus
(PS) at a price level of p̄ is
Z x̄
PS = [p̄ − S(x)] dx
0

which is the area between p = p̄ and p = S(x) from x = 0 to x = x̄,

as shown in the previous figure.

The producers’ surplus represents the total gain to producers who are
willing to supply units at a lower price than p̄ but are still able to
supply units at p̄.

So, how much did the producer in the toothpaste problem gain?

Example 2: Find the producers’ surplus at a price level of $6 for the price-
supply equation
p = S(x) = 0.03x2 + 3.

Solution: Find x̄, the supply when the price is p̄ = 6:

p̄ = 0.03x̄2 + 3
6 = 0.03x̄2 + 3
−0.03x̄2 = −3
x̄2 = 100
x̄ = 10

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Computing for the producer’s surplus:
Z x̄
PS = [p̄ − S(x)] dx
0

Z 10
6 − (0.03x2 + 3) dx
 
=
0

Z 10
3 − 0.03x2 dx


=
0

  10 3
= 3x − 0.01x 
0

= [3(10) − 0.01(10)3 ] − [3(0) − 0.01(0)3 ]

= $20

The total gain to producers who are able to supply 10 units of toothpaste is
$20.

Try this out!

Exercise 2:

1. Find the producers’ surplus at a price level of p̄ = $67 for the price-
supply eqaution

p = S(x) = 10 + 0.1x + 0.0003x2 .

2. Find the producers’ surplus at a price level of p̄ = $21 for the price-
supply eqaution
p = S(x) = 11 + 0.05x.

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In a free competitive market, the price of a product is determined by the
relationship between supply and demand. If p = D(x) and p = S(x) are
the price-demand and price-supply equations, respectively for a product and
if (x̄, p̄) is the point of intersection of these equations, then p̄ is called the
equilibrium price and x̄ is called the equilibrium quantity. If the price
stabilizes at the equilibrium price p̄, then this is the price level that will de-
termine both the consumers’ surplus and the producers’ surplus.

Using the toothpaste problem, if we graph the price-demand equation (p =

D(x) = 12 − 0.6x) and the price-supply equation (p = S(x) = 0.03x2 + 3)
on the same plane, the two graphs will intersect at (10, 6). Therefore, the
equilibrium price is p̄ = $6 and the equilibrium quantity is x̄ = 10 units.

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Example 3: Find the consumers’ surplus and the producers’ surplus at the
equilibrium price level for the given price-demand and price-supply equations.

p = D(x) = 80e−0.001x

p = S(x) = 30e0.001x
Solution: First we need to find the equilibrium point (x̄, p̄). Since the equi-
librium point is the point of intersection of the two graphs, we equate the
two equations.
D(x) = S(x)

80e−0.001x = 30e0.001x

e−0.001x 3
0.001x
=
e 8
3
e−0.002x =
8
 
3
−0.002x = ln
8

ln 83


x =
−0.002

x ≈ 490
We now have the value of x̄. To find p̄, plug-in x = 490 to either D(x) or
S(x).
p = D(490) = 80e−0.001(490) ≈ 49
(or p = S(490) = 30e0.001(490) ≈ 49)
Therefore, (x̄, p̄) = (490, 49).

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The consumers’ surplus is
Z 490
 −0.001x 
CS = 80e − 49 dx
0

490
= [−80, 000e−0.001x − 49x] 

0

= −80, 000e−0.001(490) − 49(490) − −80, 000e−0.001(0) − 49(0)

   

≈ [−73, 020] − [−80, 000]

= 6, 980

The total savings to consumers who are able to buy 490 units of the prod-
uct/commodity is 6,980.

The producers’ surplus is

Z 490
49 − 30e0.001x dx
 
PS =
0

490
= [49x − 30, 000e0.001x ] 

0
   
= 49(490) − 30, 000e0.001(490) − 49(0) − 30, 000e0.001(0)

≈ [−24, 959] − [−30, 000]

= 5, 041

The total gain to producers who are able to supply 490 units of the prod-
uct/commodity is 5, 041.

Try this out!

Exercise 3: Find the consumers’ surplus and the producers’ surplus at the
equilibrium price level for the given price-demand and price-supply equations.

p = D(x) = 50 − 0.1x

p = S(x) = 11 + 0.05x

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