digplanet beta 1: Athena
Share digplanet:

Agriculture

Applied sciences

Arts

Belief

Business

Chronology

Culture

Education

Environment

Geography

Health

History

Humanities

Language

Law

Life

Mathematics

Nature

People

Politics

Science

Society

Technology

This article is about consumers' and producers' surplus. For information about other surpluses, see Surplus.
Graph illustrating consumer (red) and producer (blue) surpluses on a supply and demand chart

In mainstream economics, economic surplus, also known as total welfare or Marshallian surplus (named after Alfred Marshall), refers to two related quantities. Consumer surplus or consumers' surplus is the monetary gain obtained by consumers because they are able to purchase a product for a price that is less than the highest price that they would be willing to pay. Producer surplus or producers' surplus is the amount that producers benefit by selling at a market price that is higher than the least that they would be willing to sell for; this is roughly equal to profit (since producers are not normally willing to sell at a loss, and are normally indifferent to selling at a breakeven price).

In Marxian economics, the term surplus may also refer to surplus value, surplus product and surplus labour.

Overview[edit]

Economist Paul A. Baran introduced the concept of "economic surplus" to deal with novel complexities raised by the dominance of monopoly capital. With Paul Sweezy, Baran elaborated the importance of this innovation, its consistency with Marx's labor concept of value, and supplementary relation to Marx's category of surplus value.[1]

On a standard supply and demand diagram, consumer surplus is the area (triangular if the supply and demand curves are linear) above the equilibrium price of the good and below the demand curve. This reflects the fact that consumers would have been willing to buy a single unit of the good at a price higher than the equilibrium price, a second unit at a price below that but still above the equilibrium price, etc., yet they in fact pay just the equilibrium price for each unit they buy.

Likewise, in the supply-demand diagram, producer surplus is the area below the equilibrium price but above the supply curve. This reflects the fact that producers would have been willing to supply the first unit at a price lower than the equilibrium price, the second unit at a price above that but still below the equilibrium price, etc., yet they in fact receive the equilibrium price for all the units they sell.

Consumer surplus[edit]

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. An example of a good with generally high consumer surplus is drinking water. People would pay very high prices for drinking water, as they need it to survive. The difference in the price that they would pay, if they had to, and the amount that they pay now is their consumer surplus. Note that the utility of the first few liters of drinking water is very high (as it prevents death), so the first few litres would likely have more consumer surplus than subsequent liters.

The maximum amount a consumer would be willing to pay for a given quantity of a good is the sum of the maximum price they would pay for the first unit, the (lower) maximum price they would be willing to pay for the second unit, etc. Typically these prices are decreasing; they are given by the individual demand curve. For a given price the consumer buys the amount for which the consumer surplus is highest, where consumer surplus is the sum, over all units, of the excess of the maximum willingness to pay over the equilibrium (market) price. The consumer's surplus is highest at the largest number of units for which, even for the last unit, the maximum willingness to pay is not below the market price

The aggregate consumers' surplus is the sum of the consumer's surplus for all individual consumers. This can be represented graphically as shown in the above graph of the market demand and supply curves.

Calculation from supply and demand[edit]

The consumer surplus (individual or aggregated) is the area under the (individual or aggregated) demand curve and above a horizontal line at the actual price (in the aggregated case: the equilibrium price). If the demand curve is a straight line, the consumer surplus is the area of a triangle:

CS = \frac{1}{2} Q_{\mathit{mkt}} \left( {P_{\mathit{max}} - P_{\mathit{mkt}}} \right)

Where Pmkt is the equilibrium price (where supply equals demand), Qmkt is the total quantity purchased at the equilibrium price and Pmax is the price at which the quantity purchased would fall to 0 (that is, where the demand curve intercepts the price axis). For more general demand and supply functions, these areas are not triangles but can still be found using integral calculus. Consumer surplus is thus the definite integral of the demand function with respect to price, from the market price to the maximum reservation price (i.e. the price-intercept of the demand function):

CS = \int^{P_{\mathit{max}}}_{P_{\mathit{mkt}}} D(P)\, dP, where D(P_{\mathit{max}}) = 0.

This shows that if we see a rise in the equilibrium price and a fall in the equilibrium quantity, then consumer surplus falls.

Distribution of benefits when price falls[edit]

When supply of a good expands, the price falls (assuming the demand curve is downward sloping) and consumer surplus increases. This benefits two groups of people: Consumers who were already willing to buy at the initial price benefit from a price reduction; also they may buy more and receive even more consumer surplus, and additional consumers who were unwilling to buy at the initial price but will buy at the new price and also receive some consumer surplus.

Consider an example of linear supply and demand curves. For an initial supply curve S0, consumer surplus is the triangle above the line formed by price P0 to the demand line (bounded on the left by the price axis and on the top by the demand line). If supply expands from S0 to S1, the consumers' surplus expands to the triangle above P1 and below the demand line (still bounded by the price axis). The change in consumer's surplus is difference in area between the two triangles, and that is the consumer welfare associated with expansion of supply.

Some people were willing to pay the higher price P0. When the price is reduced, their benefit is the area in the rectangle formed on the top by P0, on the bottom by P1, on the left by the price axis and on the right by line extending vertically upwards from Q0.

The second set of beneficiaries are consumers who buy more, and new consumers, those who will pay the new lower price (P1) but not the higher price (P0). Their additional consumption makes up the difference between Q1 and Q0. Their consumer surplus is the triangle bounded on the left by the line extending vertically upwards from Q0, on the right and top by the demand line, and on the bottom by the line extending horizontally to the right from P1.

Rule of one-half[edit]

The rule of one-half estimates the change in consumer surplus for small changes in supply with a constant demand curve. Note that in the special case where the consumer demand curve is linear, consumer surplus is the area of the triangle bounded by the vertical line Q=0, the horizontal line P = P_{mkt} and the linear demand curve. Hence, the change in consumer surplus is the area of the trapezoid with i) height equal to the change in price and ii) mid-segment length equal to the average of the ex-post and ex-ante equilibrium quantities. Following the figure above,

\Delta CS = \frac{1}{2} \left( {Q_1  + Q_0 } \right)\left( {P_1 - P_0} \right)

where:

  • CS = consumers' surplus
  • Q0 and Q1 are, respectively, the quantity demanded before and after a change in supply
  • P0 and P1 are, respectively, the prices before and after a change in supply

See also[edit]

References[edit]

  1. ^ Baran, P.A. & Sweezy, P.M. (2012). "Some Theoretical Implications". Monthly Review. 64 (3).

Further reading[edit]


Original courtesy of Wikipedia: http://en.wikipedia.org/wiki/Economic_surplus — Please support Wikipedia.
This page uses Creative Commons Licensed content from Wikipedia. A portion of the proceeds from advertising on Digplanet goes to supporting Wikipedia.
1 videos found

https://youtube.com/devicesupport

https://youtube.com/devicesupport http://m.youtube.com

 
1 videos found

1870 news items

The New Daily

MuMbrella
Sun, 17 May 2015 17:45:07 -0700

It examined both the economic surplus generated by the industry and the economic investment made by broadcasters. “We are at a critical time for broadcasters. We are all investing in new services to respond to audience demands for our content when and ...
 
TelevisionPost
Wed, 20 May 2015 02:22:30 -0700

'The Value Of Free TV: The Contribution Of Commercial Free-To-Air Television To The Australian Economy' was prepared by Venture Consulting and commissioned by Free TV Australia. It examined both the economic surplus generated by the industry and ...

NFL Mocks

NFL Mocks
Fri, 22 May 2015 09:33:50 -0700

Hosting the Super Bowl is one of the biggest honors an NFL team and its city can be bestowed. The national media attention, the economic surplus, the ability to flash your cities best. It's a great thing for both the game and the city. Unfortunately ...

teleSUR English

teleSUR English
Fri, 22 May 2015 12:52:30 -0700

Forty-five percent of national production was generated by the largest businesses, which together represented 0.7 percent of all companies in El Salvador. These companies appropriated 59 percent of the economic surplus generated in the entire economy.

Links International Journal of Socialist Renewal

Links International Journal of Socialist Renewal
Thu, 21 May 2015 01:23:45 -0700

Regardless of how the economic surplus is invested, Lebowitz contends, this system is based on exploitation, because workers have no control over how the surplus is utilized. Even if workers benefit from this surplus, the vanguard system is based on ...

Monthly Review

Monthly Review
Sat, 16 May 2015 12:30:00 -0700

Regardless of how the economic surplus is invested, Lebowitz contends, this system is based on exploitation, because workers have no control over how the surplus is utilized. Even if workers benefit from this surplus, the vanguard system is based on ...

FT Alphaville (registration)

FT Alphaville (registration)
Wed, 13 May 2015 00:18:45 -0700

Policies and practices such as social insurance, government investment in human capital, workplace regulation, and collective bargaining overcome real market failures, meaning economic surplus is being generated by those policies, and the debate is ...

The Guardian

The Guardian
Tue, 05 May 2015 11:43:00 -0700

'The feeling they give us is that they are impossible to satisfy,' said Greek minister Panagiotis Kouroumblis of the country's creditors. Photograph: Petros Giannakouris/AP. Helena Smith in Athens. Tuesday 5 May 2015 14.42 EDT Last modified on Tuesday ...
Loading

Oops, we seem to be having trouble contacting Twitter

Support Wikipedia

A portion of the proceeds from advertising on Digplanet goes to supporting Wikipedia. Please add your support for Wikipedia!

Searchlight Group

Digplanet also receives support from Searchlight Group. Visit Searchlight