Consumer Surplus and the Demand Curve

Consumer Surplus and the Demand Curve

· A consumer’s willingness to pay for a good is the maximum price at which he or she would buy that good.

· Individual consumer surplus is the net gain to an individual buyer from the purchase of a good. It is equal to the difference between the buyer’s willingness to pay and the price paid.

Willingness to pay and consumer surplus

· Total consumer surplus is the sum of the individual consumer surpluses of all the buyers of a good

· The term consumer surplus is often used to refer to both individual and total consumer surplus

How changing Prices affect consumer surplus

· A fall in the price of a good increases consumer surplus through two channels:
* A gain to consumers who would have bought at the original price
* A gain to consumers who are persuaded to buy the lower price.

Producer Surplus and the supply curve

· A potential seller’s cost is the lowest price at which he or she is willing to sell a good

· Individual producer surplus is the net gain to a seller from selling a good. It is equal to the difference between the price received and the seller’s cost.

Changes in Producer Surplus

· When the price of a good rises, producer surplus increases through two channels:
* The gains of those who would have supplied the good even the original, lower price
* The gains of those who are induced to supply the good by the higher price.

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