Consumer surplus is the value that the consumers gain from consuming a good or a service over and above the price paid for the good or service. It is the difference between the price that the consumers are willing to pay and the actual price being paid by them. Each individual may receive varying levels of consumer surplus. The total of the consumer surplus enjoyed by all the individuals can be summed up to get the total consumer surplus for the society. It can also be interpreted as the welfare that the society gains from consuming the good.
Marginal Social Benefit (MSB) is the additional benefit that the society benefits from consuming an extra unit of a good.
In the above diagram, Consumer Surplus is shown by the shaded region which is above the price level and below the demand curve.
Changes to consumer surplus
- If the price increases, it will decrease the consumer surplus and vice versa.
- If the supply curve shifts to the left, the consumer surplus will decrease.
- If the supply curve shifts to the right, the consumer surplus will increase.
Producer Surplus is the difference between the price received by the firms for a good or service and the price at which they would have been prepared to supply that good or service.
Another way of defining producer surplus is ‘as the surplus earned by the firm over and above the minimum that would have kept them in the market. It is the raison d’être of firms.
Changes to producer surplus
- If the price increases, it will increase the producer surplus and vice versa.
- If the demand curve shifts to the left, the producer surplus will decrease.
- If the demand curve shifts to the right, the producer surplus will increase.