CONSUMER AND PRODUCER SURPLUSES
Consumer surplus -the difference between what consumers are willing to pay rather than go without a commodity and what they actually have to pay in the market. DEFINITION: Producer surplus - the sum of all short - run profits in an industry; the difference between total revenue from supplying a good and the costs represented by the area under the supply curve. The area in Grey in the diagram on the right shows the producer surplus. DEFINITION: |
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CONSUMER SURPLUS | ||
CONSUMER SPENDING |
TOTAL CONSUMER UTILITY |
CONSUMER SURPLUS |
Total Consumer Spending on the product is equal to the area in purple - which in this case is $900 0000. | But the total number of utils (shown by the area in brown above)- measured in dollars is
$1 125 000. |
So the consumer surplus is $225 000, as shown by the area in blue above. |
PRODUCER SURPLUS | ||
PRODUCER REVENUE |
PRODUCER COSTS OF PRODUCTION |
PRODUCER SURPLUS |
Total revenue from sell the product is shown by the area in purple. Which in the this case is $900 000. |
Total costs of production are shown by the area in gray above. In this case it is $750 000. |
So the producer surplus is equal to the area in yellow above, which is $150 000. |