IB Economics 2.3.5 Social/community Surplus Notes

Calculating the social surplus under market equilibrium

Consumer Surplus

1. In the figure, consumer surplus is represented by the area above the equilibrium price ($P_e$) and below the demand curve (D).
2. It highlights the additional value consumers derive from purchasing goods at a price lower than their willingness to pay.

Producer Surplus

1. This is shown by the area below the equilibrium price ($P_e$) and above the supply curve (S).
2. It represents the benefit producers gain by selling goods at a price higher than their minimum acceptable price.

Social Surplus

1. The total shaded area in the diagram (both the consumer surplus and the producer surplus) illustrates the social surplus.
2. It is the sum of these two areas, combining consumer and producer benefits.

Calculation of social surplus

Social surplus is the sum of consumer surplus and producer surplus:

$$\text{Social surplus}=\text{CS} + \text{PS}$$

Consumer Surplus (CS) Calculation:

It is calculated as the area of a triangle:

$$\text{CS} = \\ \frac{1}{2} \times (\text{Base of Triangle}) \times (\text{Height of Triangle})$$

• The base corresponds to the quantity traded at equilibrium ($Q_e$).
• The height corresponds to the difference between the highest price consumers are willing to pay (intersection of demand curve with price axis) and the equilibrium price ($P_e$).

Producer Surplus (PS) Calculation:

Similarly, the producer surplus is calculated as the area of a triangle:

$$\text{PS}=\\ \frac{1}{2} \times \text{Base of Triangle} \times \text{Height of Triangle}$$

• The base is again the quantity traded at equilibrium ($Q_e$).
• The height is the difference between the equilibrium price ($P_e$) and the lowest price producers are willing to accept (intersection of supply curve with price axis).

Total social surplus

1. Adding the consumer surplus and producer surplus provides the total social surplus, which represents the total net benefit to society from the production and consumption of the good at equilibrium.
2. Therefore: $\text{Social surplus}=\text{CS} + \text{PS}$