1. Consumer Surplus and Producer Surplus
Consumer surplus is the amount that a buyer is willing to pay for a good minus the amount she actually pays for it.
Consumer surplus, measures the benefit to buyers participating in a market.
Producer surplus is the amount a seller is paid for a good minus the seller’s cost.
It measures the benefit to sellers participating in a market.

2. The area below the demand curve and above the price measures the consumer surplus in the market.
The area above the supply curve and below the price measures the producer surplus in the market.

4. The Demand Schedule

5. The Demand Curve Price of Demand Album $100 John ’
s willingness to pay 80
Paul ’
s willingness to pay 70
George ’
s willingness to pay 50
Ringo ’
s willingness to pay 1 2 3 4
Quantity of
Albums

6. Measuring Consumer Surplus with the Demand Curve
(a) Price = $80
Price of
Demand
Album
$100
John ’
s consumer surplus ($20) 80 70 50 1 2 3 4
Quantity of
Albums

7. Measuring Consumer Surplus with the Demand Curve
(b) Price = $70
Price of
Demand
Album
$100
John ’
s consumer surplus ($30) 80
Paul ’
s consumer
surplus ($10) 70
Total
consumer
surplus ($40) 50 1 2 3 4
Quantity of
Albums

8. How the Price Affects Consumer Surplus
(a) Consumer Surplus at Price P
Price A
Demand
Consumer
surplus P1 Q1 B C
Quantity

9. How the Price Affects Consumer Surplus
(b) Consumer Surplus at Price P
Price A B C
Initial
consumer
surplus
Demand
Consumer surplus
to new consumers P1 Q1 D E F P2 Q2
Additional consumer
surplus to initial
consumers
Quantity

10. What Does Consumer Surplus Measure?
Consumer surplus, the amount that buyers are willing to pay for a good minus the amount they actually pay for it, measures the net benefit that buyers receive from a good as the buyers themselves perceive it.

11. PRODUCER SURPLUS
Producer surplus is the amount a seller is paid for a good minus the seller’s cost.
It measures the benefit to sellers participating in a market.

12. The Costs of Four Possible Sellers

13. Using the Supply Curve to Measure Producer Surplus
Just as consumer surplus is related to the demand curve, producer surplus is closely related to the supply curve.
The area below the price and above the supply curve measures the producer surplus in a market.

14. The Supply Schedule

15. The Supply Curve

16. Measuring Producer Surplus with the Supply Curve
(a) Price = $600
Price of
House
Supply
Painting
$900
800
600
Grandma ’
s producer
surplus ($100)
500 1 2 3 4
Quantity of
Houses Painted

17. Measuring Producer Surplus with the Supply Curve
(b) Price = $800
Price of
House
Supply
Painting
Total
producer
surplus ($500)
$900
800
600
Georgia ’
s producer
surplus ($200)
500
Grandma ’
s producer
surplus ($300) 1 2 3 4
Quantity of
Houses Painted

18. How the Price Affects Producer Surplus
(a) Producer Surplus at Price P
Price
Supply B A C Q1 P1
Producer
surplus
Quantity

19. How the Price Affects Producer Surplus
(b) Producer Surplus at Price P
Price
Additional producer
surplus to initial
producers
Supply D E F P2 Q2
Producer surplus
to new producers B P1 C
Initial
producer
surplus A Q1
Quantity

20. Consumer and Producer Surplus in the Market Equilibrium
Price A C B D E
Consumer
surplus
Demand
Supply
Equilibrium
price
quantity
Producer
surplus
Quantity

21. Evaluating the Market Equilibrium
Three Insights Concerning Market Outcomes
Free markets allocate the supply of goods to the buyers who value them most highly, as measured by their willingness to pay.
Free markets allocate the demand for goods to the sellers who can produce them at least cost.
Free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus.

22. The Efficiency of the Equilibrium Quantity
Price
Supply
Demand
Value to
buyers
Cost to
sellers
Equilibrium
quantity
Cost to
sellers
Value to
buyers
Quantity
Value to buyers is greater
than cost to sellers.
Value to buyers is less
than cost to sellers.