Consumer surplus and producer surplus

Definitions

• Consumer surplus is the difference between the price consumers are willing to pay and the price they actually pay. Many buyers would have paid more than the market price; the extra is a gain to them.
• Producer surplus is the difference between the price producers receive and the lowest price they would have accepted (the price on the supply curve).

Diagram in words: draw D and S crossing at equilibrium (P1, Q1). Consumer surplus is the triangle below the demand curve and above the price line P1, from the price axis to Q1. Producer surplus is the triangle above the supply curve and below P1, from the price axis to Q1. Together they are total (community) surplus, which is largest at the free market equilibrium when there is no market failure.

Calculating surplus

For straight lines, each surplus is a triangle: area = 1/2 x base x height.

With Qd = 120 - 4P and Qs = -20 + 3P: equilibrium P = 20, Q = 40. Demand meets the price axis at P = 30, supply at P = 6.67.

• Consumer surplus = 1/2 x 40 x (30 - 20) = 200
• Producer surplus = 1/2 x 40 x (20 - 6.67) = 266.67

Changes in demand and supply

• Supply increases (S shifts right): price falls and quantity rises, so consumer surplus rises (buyers pay less and buy more). Producer surplus may rise or fall depending on the curves.
• Supply decreases: consumer surplus falls (higher price, lower quantity).
• Demand increases (D shifts right): price and quantity rise, so producer surplus rises. The consumer surplus triangle moves up; its size depends on the new curve.
• Demand decreases: producer surplus falls.

Recent Pearson 4-mark 'explain, illustrating your answer with a diagram' questions are marked K1, A1, An2: here that means defining consumer surplus, drawing the diagram with the shift, and analysing the original and new surplus areas. Label the areas with letters and say which are gained or lost.

Worked example

Demand rises from Qd = 120 - 4P to Qd = 160 - 4P, with supply Qs = -20 + 3P. Calculate the change in producer surplus.

1. New equilibrium: 160 - 4P = -20 + 3P, P = 25.71, Q = 57.14.
2. New PS = 1/2 x 57.14 x (25.71 - 6.67) = 544.22.
3. Old PS = 266.67.

Answer: Producer surplus rises by 277.55.

Check yourself

1. Demand meets the price axis at $50. The equilibrium price is $30 and equilibrium quantity is 400. Calculate consumer surplus (straight-line demand).
   Show answer

   $4000. CS = 1/2 x 400 x (50 - 30) = 4,000.

2. Supply meets the price axis at $10. The equilibrium price is $30 and equilibrium quantity is 400. Calculate producer surplus (straight-line supply).
   Show answer

   $4000. PS = 1/2 x 400 x (30 - 10) = 4,000.

3. Using the lesson's market, demand rises to Qd = 160 - 4P. Calculate the new consumer surplus to 2 decimal places.
   Show answer

   408.16. New P = 25.71, Q = 57.14; demand meets the price axis at 40; CS = 1/2 x 57.14 x (40 - 25.71) = 408.16.

4. Consumer surplus is
   • the difference between what consumers are willing to pay and what they actually pay
   • the profit made by firms
   • the quantity of excess demand
   • the difference between price and cost of production
   Show answer

   the difference between what consumers are willing to pay and what they actually pay. It is the extra value buyers get from paying less than their maximum.

5. On a supply and demand diagram, producer surplus is the area
   • under the demand curve and over the market price
   • below the supply curve
   • over the supply curve and under the market price
   • to the right of equilibrium quantity
   Show answer

   over the supply curve and under the market price. Producers receive the price but would have accepted the lower price on S.

6. New technology shifts the supply of laptops to the right. Consumer surplus in the laptop market will
   • increase
   • decrease
   • stay the same
   • become zero
   Show answer

   increase. Lower price and higher quantity enlarge the triangle under demand.

7. Explain what happens to producer surplus when demand for a product falls.
   Show answer

   Demand shifts left, so the equilibrium price and quantity fall. Producers receive a lower price and sell fewer units, so the area between the price and the supply curve shrinks and producer surplus falls.. State the shift, the new price and quantity, then the area.

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Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification (2018)

Last updated 8 November 2026. Spotted a mistake? Tell us.