Consumer and Producer Surplus

Idea

Consumer surplus and producer surplus measure the welfare each side gains from trading at the equilibrium price. They are read as areas on the equilibrium diagram, between the price line and the relevant curve.

Diagram

Surplus at equilibrium B (price P0, quantity Q0). Consumer surplus is area P0AB (below demand, above price); producer surplus is area P0BC (above supply, below price). A is the demand intercept, C the supply intercept.

Mechanism

Consumer surplus — area P0AB. Every consumer up to Q0 was willing to pay more than the equilibrium price P0 (their willingness is read off the demand curve, from the intercept A down to B), yet all pay only P0. The triangle between the demand curve and the price line captures that saved value.
Producer surplus — area P0BC. Every producer up to Q0 was willing to sell for less than P0 (their minimum is read off the supply curve, from the intercept C up to B), yet all receive P0. The triangle between the price line and the supply curve captures that gained value.

At equilibrium the quantity Q0 maximises the sum of the two surpluses; total welfare is area ABC. The rectangle 0P0BQ0 below the surpluses is total revenue to producers, equal to total expenditure by consumers.

Considerations

Surplus areas are how the welfare effect of any change is marked. A shift that raises both price and quantity, or lowers them, redistributes surplus between consumers and producers; the shifts in demand and supply note records that both surpluses rise when the market expands and fall when it contracts.