ADDITIONAL EXPLANATIONS:

Supply and Demand - The law of supply and demand combines two fundamental economic principles
describing how changes in the price of a resource, commodity, or product affect its supply and demand.

As the price increases, supply rises while demand declines. Conversely, as the price drops supply
constricts while demand grows.

Higher prices cause supply to increase while demand drops. Lower prices boost demand while limiting
supply. The market-clearing price is one at which supply and demand are balanced.

Effects on Suppliers and Consumers - as the price rises, suppliers are willing to produce more. Demand is
generally considered to slope downward: at higher prices, consumers buy less.
Consumer Surplus - Consumer surplus is an economic measurement of consumer benefits resulting from
market competition. A consumer surplus happens when the price that consumers pay for a product or
service is less than the price they're willing to pay. It's a measure of the additional benefit that consumers
receive because they're paying less for something than what they were willing to pay.

Consumer surplus may be compared with producer surplus.

An economic measurement of consumer benefits

KEY TAKEAWAYS

 A consumer surplus happens when the price consumers pay for a product or service is less than
the price they're willing to pay.
 Consumer surplus is based on the economic theory of marginal utility, which is the additional
satisfaction a consumer gains from one more unit of a good or service.
 Consumer surplus always increases as the price of a good falls and decreases as the price of a
good rises.
 It is depicted visually by economists as the triangular area under the demand curve between the
market price and what consumers would be willing to pay.
 Consumer surplus plus producer surplus equals the total economic surplus.

Example of Consumer Surplus

Consumer surplus is the benefit or good feeling of getting a good deal. For example, let's say that you
bought an airline ticket for a flight to Disney World during school vacation week for $100, but you were
expecting and willing to pay $300 for one ticket. The $200 represents your consumer surplus.

However, businesses know how to turn consumer surplus into producer surplus or for their gain. In our
example, let's say the airline realizes your surplus and as the calendar draws near to school vacation
week raises its ticket prices to $300 each.
The airline knows there will be a spike in demand for travel to Disney World during school vacation
week and that consumers will be willing to pay higher prices. So by raising the ticket prices, the airlines
are taking consumer surplus and turning it into producer surplus or additional profits.

Producer Surplus - Producer surplus is the difference between how much a person would be willing to
accept for a given quantity of a good versus how much they can receive by selling the good at the market
price. The difference or surplus amount is the benefit the producer receives for selling the good in the
market.

A producer surplus is generated by market prices in excess of the lowest price producers would
otherwise be willing to accept for their goods.

KEY TAKEAWAYS

 Producer surplus is the total amount that a producer benefits from producing and selling a
quantity of a good at the market price.
 The total revenue that a producer receives from selling their goods minus the marginal cost of
production equals the producer surplus.
 Producer surplus plus consumer surplus represents the total economic benefit to everyone in the
market from participating in production and trade of the good.

Example of Producer Surplus

The company may be willing to sell a Big Mac for $4, which is perhaps the cost to produce it. However,
customers are willing to pay $7 for it, resulting in a producer surplus of $3. This $3 is the difference
between what McDonald’s is willing to sell the Big Mac for and what the consumer is actually paying for
it.
What are Consumer Surplus and Producer Surplus?

Both consumer surplus and producer surplus are economic terms used to define market wellness by
studying the relationship between the consumers and suppliers. They explain the opportunity cost
consumers forego to gain a marginal benefit for buying a good or service. To the producer, it is the
willingness and ability to produce an extra unit of a product based on the marginal cost of producing more
goods.

Summary

 Both consumer surplus and producer surplus are economic terms used to define market wellness
by studying the relationship between the consumers and suppliers.
 The consumer surplus refers to the difference between what a consumer is willing to pay and
what they paid for a product.
 The producer surplus is the difference between the market price and the lowest price a producer is
willing to accept to produce a good.