Microeconomics - Calculating Consumer and Producer Surplus

Tutorial on how calculating producer and consumer surplus in a market with perfect competition. This movie describes what consumer surplus is, and how to calculate it with various changes in price, demand, and supply.

Suppose the market for watermelons can be described by the graph below.

If Jon is willing to pay as much as $8 for a watermelon, how much surplus would he receive if he pays the market price for a watermelon?

Suppose Figgy Farms requires at least $5 per watermelon to be willing to sell in this market. What is Figgy's producer surplus for one watermelon in this market?

How much total consumer surplus is received in this market?

How much total producer surplus is received in this market?

What is the total surplus (combined consumer and producer surplus) in the market?

ANSWERS:
Consumer surplus is the difference between the maximum Jon is willing to pay and the price he actually pays. The equilibrium price in this market is $6, so his consumer surplus is $2. $2 = $8 – $6.

Producer surplus is the difference between the market price and the minimum a seller requires to offer the product for sale. In this case,
Figgy's producer surplus is $6 – $5 = $1.

Total consumer surplus is the area below the demand curve but above the market price. The area of this triangle on the graph is ½ x ($11 – $6) x 200 = $500.

Total producer surplus is the area above the supply curve but below the market price. The area of this triangle on the graph is ½ x ($6 – $4) x 200 = $200.

The total surplus is the sum of consumer and producer surplus, or $500 + $200 = $700.

CONSUMER SURPLUS
Consumer surplus is the difference between the maximum price a consumer is willing to pay and the actual price they do pay. If a consumer would be willing to pay more than the current asking price, then they are getting more benefit from the purchased product than they initially paid.

PRODUCER SURPLUS
Producer surplus is an economic measure of the difference between the amount a producer of a good receives and the minimum amount the producer is willing to accept for the good. The difference, or surplus amount, is the benefit the producer receives for selling the good in the market. Producer surplus is generated by market prices in excess of the lowest price producers would otherwise be willing to accept for their goods.