Lesson: Demand, Supply, and Efficiency

Consumer Surplus, Producer Surplus, Social Surplus

FOCUS: As you read, pay attention to demand, supply and efficiency.

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  • The point where the demand and supply meet is called the equilibrium price.
    • Above the supply level and below the equilibrium price is called the product surplus. 
    • Below the demand level and above the equilibrium price is called the consumer surplus.
  • Consumer surplus is beneficial to consumers. A consumer surplus happens when the price is less than amount consumers are willing to pay. In other words, consumer surplus is when the price is lower than the consumer expects it to be. The consumer benefits from consumer surplus because the price is lower. The consumer prefers the lower price.

Consider a market for tablet computers, as the figure shows. The equilibrium price is $80, and the equilibrium quantity is 28 million. To see the benefits to consumers, look at the segment of the demand curve above the equilibrium point and to the left. This portion of the demand curve shows that at least some demanders would have been willing to pay more than $80 for a tablet.

For example, point J shows that if the price were $90, 20 million tablets would be sold. Those consumers who would have been willing to pay $90 for a tablet, based on the utility they expect to receive from it, but who were able to pay the equilibrium price of $80, clearly received a benefit beyond what they had to pay. Remember, the demand curve traces consumers’ willingness to pay for different quantities. 

Consumer surplus is the amount that individuals would have been willing to pay minus the amount that they paid. 

Consumer surplus is the area labeled F—that is, the area above the market price and below the demand curve. The somewhat triangular area labeled by F  shows that the equilibrium price in the market was less than what many of the consumers were willing to pay. Point J on the demand curve shows that, even at the price of $90, consumers would have been willing to purchase a quantity of 20 million. The somewhat triangular area labeled by G shows the area of producer surplus, which shows that the equilibrium price received in the market was more than what many of the producers were willing to accept for their products. For example, point K on the supply curve shows that at  $45, firms would have been willing to supply a quantity of 14 million.