Learning Objective 1 :
Distinguish between the concepts of consumer surplus and producer surplus.
Consumer surplus measures the dollar benefit consumers receive from buying goods and services in a particular market. Producer surplus measures the dollar benefit firms receive from selling goods and services in a particular market. Economic surplus is the sum of consumer surplus plus producer surplus. When the government imposes a price ceiling or a price floor, the amount of economic surplus is reduced.
A. Consumer Surplus
Consumer surplus measures the difference between the highest price a consumer is willing to pay and the price the consumer actually pays. The demand curve can be used to measure the total consumer surplus in a market. Demand curves show the willingness of consumers to purchase a product at different prices. Consumers are willing to purchase a product up to the point where the marginal benefit of consuming a product is equal to its price. The marginal benefit is the additional benefit to a consumer from consuming one more unit of a good or service. The total amount of consumer surplus in a market is equal to the area below the demand curve and above the market price. This area represents the benefit to consumers in excess of the price they paid for a product.
B. Producer Surplus
Supply curves show the willingness of firms to supply a product at different prices. Firms will supply an additional unit of a product only if they receive a price equal to the additional cost of producing that unit. Marginal cost is the additional cost to a firm of producing one more unit of a good or service. Often, the marginal cost of producing a good increases as more of the good is produced during a given time period.
Producer surplus is the difference between the lowest price a firm would have been willing to accept and the price it actually receives. The total amount of producer surplus in a market is equal to the area above the market supply curve and below the market price.
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