Consumer and
Producer Surplus
Efficiency and
Deadweight Loss
Consumer Surplus
The difference between the maximum price consumers are willing to pay for
a product and the actual price.
The surplus, measurable in dollar terms, reflects the extra utility gained from
paying a lower price than what is required to obtain the good.
Consumer surplus can be measured by calculating the difference between
the maximum willingness to pay and the actual price for each
consumer, and then summing those differences.
Or consumer surplus is shown graphically as the area under the demand
curve and above the equilibrium price.
Consumer surplus and price are inversely related – all else equal, a higher
price reduces consumer surplus.
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Consumer Surplus In a competitive market, the
actual price will be the
equilibrium or market price.
The difference between the maximum price consumers are willing to pay for
a product and the actual price.
The surplus, measurable in dollar terms, reflects the extra utility gained from
paying a lower price than what is required to obtain the good.
Consumer surplus can be measured by calculating the difference between
the maximum willingness to pay and the actual price for each
consumer, and then summing those differences.
Or consumer surplus is shown graphically as thewillingness
The maximum area undertothe demand
pay is the
curve and above the equilibrium price.
consumer’s marginal benefit for the
good measurable in dollar terms.
Consumer surplus and price are inversely related – all else equal, a higher
price reduces consumer surplus.
3
Consumer Surplus
P
Consumer Surplus is
the area under the demand
Market
curve and above the market
Price
price.
4
Producer Surplus
The difference between the actual price producers receive and the
minimum acceptable price.
Producer surplus can be measured by calculating the difference
between the minimum acceptable price and the actual price for each
unit sold, and then summing those differences.
Producer surplus is shown graphically as the area above the supply
curve and below the equilibrium price.
Producer surplus and price are directly related – all else equal, a
higher price increases producer surplus.
5
Producer Surplus
P
Producer surplus is
Market the area under the market
Price price and above the price
necessary for supply.
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Efficiency
Markets are allocatively efficient (i.e., the allocation of
resources to the quantity most desired) when consumer
and producer surplus are at a maximum.
Consumers receive utility up to their maximum willingness to
pay, but only have to pay the equilibrium price.
Producers receive the equilibrium price for each unit, but it only
costs the minimum acceptable price to produce.
Allocative efficiency occurs at quantity levels where three
conditions exist:
MB = MC
Maximum willingness to pay = minimum acceptable price.
Combined consumer and producer surplus is at a maximum.
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Maximum benefit to society occurs when price and
quantity are at the equilibrium point.
P
Consumer surplus and
Market Producer surplus are
Price maximized.
Equilibrium quantity Q
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Inefficiency or Deadweight Loss
Underproduction reduces both consumer and producer surplus, and
efficiency is lost because both buyers and sellers would be willing to
exchange a higher quantity.
Overproduction causes inefficiency because past the equilibrium
quantity, it costs society more to produce the good than it is worth to
the consumer in terms of willingness to pay.
A deadweight loss occurs when the combined consumer and
producer surplus is not maximized. This occurs when something
such as a price control causes either over-production or under-
production of a good or service.
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An imperfect competitor produces at a price higher and at a
quantity less than pure competition causing a loss of
efficiency.
P
Surplus is not
Maximized: MC
Consumer
Loss of efficiency
surplus
Producer
surplus
D
Q
MR
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Remember:
Consumer surplus is the difference between the maximum price
consumers are willing to pay for a product and the actual price.
Producer surplus is the difference between the actual price
producers receive and the minimum acceptable price.
Markets are efficient when the consumer and producer surpluses
are at a maximum.
A deadweight loss occurs whenever there is over-production or
under-production of a good or service.
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