Consumer and producer surplus (original) (raw)

The term surplus is used in economics for several related quantities. The consumer surplus is the amount that consumers benefit by being able to purchase a product for a price that is less than they would be willing to pay. The producer surplus is the amount that producers benefit by selling at a market price that is higher than they would be willing to sell for.

On a standard supply and demand diagram these are the areas in the triangles below:

The consumer surplus shows up above the price and below the demand curve, since the consumer is paying less for the item than the maximum that they would pay. The producer surplus shows up below the price and above the supply curve, since that is the minimum that a producer can produce that quantity with.

Combined, they make the total surplus.

A basic technique of bargaining for both parties is to pretend that one's surplus is less than it really is: the seller may argue that the price he or she asks hardly leaves him or her any profit, while the customer may play down how eager he or she is to have the article.