Course: Economics (YAN) DNC CAL_TF

Lesson: Demand, Supply, and Efficiency

Consumer Surplus, Producer Surplus, Social Surplus (continued)

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Main Ideas

Producer surplus refers to the benefit a seller gets from a sale. It is the amount that a seller pays for a good minus the seller's actual cost.
For a sale to be successful, the price must be between the lowest amount the seller will accept and the maximum amount the buyer will pay.
When the seller receives more than their lowest acceptable price, this is called producer surplus.
When the buyer gets the item for less than they were willing (or expected) to pay, this is called consumer surplus.
Social surplus is also called economic surplus or total surplus. Social surplus is the sum of consumer surplus and producer surplus.
Social surplus is the economic benefit that consumers and producers get when they buy and sell in the market.

The supply curve shows the quantity firms are willing to supply at each price. For example, point K in the figure illustrates that, at $45, firms would still have been willing to supply a quantity of 14 million. Those producers who would have been willing to supply the tablets at $45, but who were instead able to charge the equilibrium price of $80, clearly received an extra benefit beyond what they required to supply the product. The amount that a seller is paid for a good minus the seller’s actual cost is called producer surplus. In this figure, producer surplus is the area labeled G—that is, the area between the market price and the segment of the supply curve below the equilibrium.

The sum of consumer surplus and producer surplus is social surplus, also referred to as economic surplus or total surplus. In this figure, we show social surplus as the area F + G. Social surplus is larger at equilibrium quantity and price than it would be at any other quantity. This demonstrates the economic efficiency of the market equilibrium. In addition, at the efficient level of output, it is impossible to produce greater consumer surplus without reducing producer surplus, and it is impossible to produce a greater producer surplus without reducing consumer surplus.