Consumer and Producer Surplus
Read this article and attempt several practical problems related to consumer and producer surplus by answering the "Try It" quiz questions. Check your answers after you're done.
6. EXAMPLE: CALCULATE CONSUMER SURPLUS
Figure 2. Consumer and producer surpluses are shown as the area where consumers would have been willing to pay a higher price for a good or the price where producers would have been willing to sell a good.
In the sample market shown in the graph, equilibrium price is $10 and equilibrium quantity is 3 units. The consumer surplus area is highlighted above the equilibrium price line. This area can be calculated as the area of a triangle.
Recall that to find the area of a triangle, you will need to know its base and height. Refer to the following example if you need a refresher.
Figure 3. The area of a triangle.
Let's apply the calculation for the area of a triangle to our example market to see the added value that consumers will get for this item at the equilibrium price in our sample market.
Step 1: Define the base and height of the consumer surplus triangle.
The base of the consumer surplus triangle is 3 units long. Be careful when you define the height of this triangle, it is tempting to say it is 25, can you see why it isn't? The height is determined by the distance from the equilibrium price line and where the demand curve intersects the vertical axis. The height of the triangle begins at $10 and ends at $25, so it will be $25 – $10 = $15
Step 2: Apply the values for base and height to the formula for the area of a triangle.