Consumer Su♓rplus vs. Economic Surplus: An Overview

In mainstream economics, consumer surplus is the difference between the highest price for a good ᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚor service that a consumer is willing to pay and the pr🎉ice they actually pay (the market price of the good).

Economic surplus refers to two related quantities: consumer surplus and producer surplus. The producer surplus is the difference between the actual price of a good or ꦜservice–the market price–and the lowest price that a producer would be willing to acce♓pt for a good.

Economic surplus is cal💃culated by combining the surplus benefit that is experienced by both consumers and producers in an economic transaction.

Consumer Surplus

A consumer is an individual who purchases products and services. Cons🧔umer surplus is one way to determine the total ben♌efit that consumers receive from their goods and services.

If a consumer is will🅰ing to pay more for an item than the current asking price then they are theoretically receiving an additional benefit by purchasing the item at that asking price.

If the asking price was the m💟aximum they were willing to pay, then again, theoretically, they would receive no additional economic benefit from the purchased product.

Example

💛For example, before making a purchase, most consumers decide how much t🌊hey are willing to spend on an item.

Suppose a college student decides that a pair of sneakers is worth no ℱmore than $80. If the price of the sneakers is $100, then the student may decide not to buy them. However, if the price of the sneakers is $60, the student will likely buy them.

And they may feel that they got a special deal. In economic terms, they've experienced a surplus of $20: the difference between the maximum amount that the student was willing to spend ($80) and the market price of the sneakers ($60).

For consumers, a surplus represent🀅s a monetary gain because they are able to purchase an item for less than the highest price that they would h▨ave been willing to pay.

Economic Surplus

For every economic transaction, there may be both a 澳洲幸运5开奖号码历史查询:producer surplus (or profit) and consumer surplus. The aggregate–or combin♛ed–surplus is referred to as the eco𒉰nomic surplus.

In such an economic transaction, a producer is the entity or individual tha🐽t manufactures and sells goods and/or services. When a producer wishes to s𒊎ell a product, they must determine a selling price for that product.

The producer surplus is the difference between how much the 🌳producer would be willing to accept for a good and how much they actually receive by selling itꦆ at the market price. The surplus is the amount received above the lowest acceptable selling price.

Example

Suppose that the manufacturer of the aforementioned sneakers must spend $30 to manufacture, market (advertise), and distribute each pair of sneakers. The manufacturer doesn't want to lose money when selling the shoes, so $30 is the minimum amount that they are willing to accept for them.

However, because the manufacturer wants to obtain a profit and not just breakeven, they will likely elect to charge far more than $30 for the🌳 sneakers. The manufacturer must then choose a price that will make the sneakers attractive for a large number of consumers.

If the price of the sneakers is $60, then the sneaker manufacturer will earn a profit of $30 on each pair of sneakers that is sold. This profit is also known as the producer surplus.

Market Equilibrium and Surpluses

In traditional economics, the intersection of the supply and demand curves provides the market price (also called the equilibrium price) for a quantity of a good. Areas where the supply curve and the demand curve don't intersect represent many points where the price that consumers are willing to pay for a good is lower than the price that producers are willing to accept.

Consumer Surplus on Chart

On that supply and demand diagram, consumer surplus is represented by the area (usually a triangular area) above the equilibrium price of the good and below the demand curve. The point at which a priceꦫ stabilizes, so that both consumers and producers receive maximum surplus in a market, is known𒉰 as the market equilibrium.

This area𓂃 reflects the as𝄹sumption that consumers would be willing to buy a single unit of the good at a price higher than the equilibrium price, plus an additional unit at a price below that (but still above the equilibrium price). However, what they actually end up paying is just the equilibrium price for each unit.

Producer Surplus on Chart

Likewise, in the same supply and demand diagram, the producer surplus 🌞is the area below the equilibrium price but above the supply curve.

This reflects the assumption that producers would be willing to sell the first unit at a price lower than the equilibrium price, and an addi𝔍tional unit at a price above that (while still below the equilibrium price). However, in an efficient market, producers receive the equilibrium price for all the units they sell.

Therefore, at the market equilibrium, a surplus is created for both parties. That is, consumers who would have paid more pay less and producers w𒁃ho could have accepted less receive more.

The extra benefit that both consumers and producers get from the transaction is the ec💦onomic surplus.

Special Considerations

The French civil engi🐟neer and economist, Jules Dupuit, first developed the concept𝔉 of consumer surplus in the mid-19th century.

However, it was the British economist Alfred Marshall who popularized the term in his book Principles of Economics which was published in 1890.

In fact, economic surplus is so🅰metimes referred to as Marshallian surplus, after Alf💙red Marshall.

The Bottom Line

Consumer surplus is the economic benefit a consumer receives when they buy a product for less than they were willing to 𓆏pay for it. Producer surplus is the benefit a producer receives when they sel♋l a product for more than they were willing to offer it at.

Economic surplus is the total of a consumꦇer surplus and a producer surplus in a financial transaction. An economic surplus can indicate efficient market conditions where buyers and sellers both achieve their price goals.