# Consumer Surplus and Producer Surplus

Consumer Surplus is defined as the difference between the price a customer is willing to pay for a product and the price that he actually ends up paying. When a consumer gets to purchase a good at a lower price than the price he is willing to pay, he gets more benefits creating a consumer surplus. As an example, for a necessity like food, the consumer would be willing to pay a higher price as it is a necessity. But at normal market conditions consumer can obtain food at a relatively lower price than what he is willing to pay and it creates a consumer surplus. When the utility (satisfaction) of a good falls the consumer surplus reduces as the consumer will not be willing to pay higher price.The consumer surplus can be visually represented as follows:

Image Source : Bized , (2005)

The market Price is set at \$ 10 and 100 units are demanded at that price.

Therefore total revenue= \$10 X 100 units = \$1000

When the consumer is willing to pay more than \$10 per unit, consumer experiences a consumer surplus.

Producer surplus is defined as the difference between the price at which a producer is willing to sell and the price at which actually he actually ends up selling the price. When a producer gets to sell a good at a higher price than the price he is expecting, he receives a benefit creating a producer surplus. The Producer surplus can be visually represented as follows:

Image Source :Maxwell, (n.d)

Illustration

Image Source : (Answers.com , 2010)

Calculation of Consumer Surplus

Consumer Surplus

=1/2 x Quantity Demanded at Market Price x [Highest price willing to be paid- Market Price]

=1/2 x 500 x [\$10- \$5]

=\$1250

Calculation of Producer Surplus

Producer Surplus

=1/2 x Quantity sold at Market Price x [Market Price-Lowest Price willing to be accepted]

=1/2 x 500 x [\$5-0]

=\$1250

Calculation of Total Revenue

Total Revenue

=Market Price x Quantity demanded/supplied at market price

= \$5 x 500

= \$ 2500