Producer & Consumer Surplus (Edexcel A Level Economics A)

Producer & Consumer Surplus

• Consumer surplus is the difference between the amount the consumer is willing to pay for a product and the price they have actually paid

  • For example, if a consumer is willing to pay £18 to watch a movie and the price is £15, their consumer surplus is £3

• Producer surplus is the difference between the amount that the producer is willing to sell a product for and the price they actually receive

  • For example, if a producer is willing to sell a laptop for £450 and the price is £595, their producer surplus is £145

Diagram analysis

• The area between the horizontal equilibrium price line and the demand curve represents the consumer surplus in the market (ABP_e)

  • The consumer surplus lies underneath the demand curve

• The area between the horizontal equilibrium price line and the supply curve represents the producer surplus in the market (CBP_e)

  • Producer surplus lies above the supply curve

• When the market is at equilibrium the producer and consumer surplus are maximised

• Consumer surplus + producer surplus = social/community surplus

  • Any disequilibrium reduces the social surplus

How Market Changes Affect Producer & Consumer Surplus

• Any change to the condition of supply or demand will cause a shift in the relevant curve

• This shift will change the consumer and producer surplus in the market

An increase in supply

Diagram analysis

• Prior to the change in the condition of supply

  • Consumer surplus was equivalent to ACE and producer surplus was equivalent to ACF

  • Social surplus was equivalent to ECF

• After the change, supply increased S₁→S₂

  • Consumer surplus was equivalent to BED and producer surplus was equivalent to BDG

  • Social surplus was equivalent to DEG

• Both the consumer surplus and producer surplus have increased as a result of the increased supply in the market

An increase in demand

Diagram analysis

• Prior to the change in the condition of demand

  • Producer surplus was equivalent to ACE and consumer surplus was equivalent to ACF

  • Social surplus was equivalent to ECF

• After the change, demand increased D₁→D₂

  • Producer surplus was equivalent to BED and consumer surplus was equivalent to BDG

  • Social surplus was equivalent to DEG

• Both the producer surplus and consumer surplus have increased as a result of the increased demand in the market