IB Economics 2.3.4 Consumer and Producer Surplus Notes

Consumer and Producer Surplus: The Gap Between Value and Price

1. Both surpluses measure a gain from the gap between what a good is worth to someone and the price actually paid or received.
2. On the diagram, the demand curve shows the highest price buyers will pay for each unit, and the supply curve shows the lowest price sellers will accept.
3. The equilibrium price is the single price everyone actually trades at.
4. Consumer surplus is the area below the demand curve and above the price, up to the equilibrium quantity.
5. Producer surplus is the area above the supply curve and below the price, up to the equilibrium quantity.
6. A Spotify subscriber who would gladly have paid more than the fee keeps the difference as consumer surplus, while sellers who would have supplied for less keep the rest as producer surplus.
7. Added together they make total surplus, which is largest at the competitive equilibrium (covered in 2.3.5 and 2.3.6).

Consumer Surplus: The Value Buyers Keep Above the Price

1. Along the demand curve, earlier units are bought by people who value them highly, at prices like $P_2$ and $P_1$ above $P^*$.
2. Each of them still pays only $P^*$, so the gap ($P_2 - P^*$, then $P_1 - P^*$) is their personal gain.
3. Summing every gap up to $Q^*$ gives consumer surplus, the shaded area below demand and above the price.

Producer Surplus: The Value Sellers Keep Above Their Costs

1. Along the supply curve, earlier units are supplied by sellers who would accept low prices like $P_2$ and $P_1$ below $P^*$.
2. Each of them still receives $P^*$, so the gap ($P^* - P_2$, then $P^* - P_1$) is their gain.
3. Summing every gap up to $Q^*$ gives producer surplus, the shaded area above supply and below the price.