Question

Which of the following describes consumer surplus?

a) The amount a seller is paid for a good minus the seller's actual cost.

b) The difference between an item's production cost and the amount paid by consumers.

c) The social surplus minus producer surplus.

Answer 1

Option c) The social surplus minus producer surplus.

Consumer Surplus is the difference between what a consumer is willing to pay for a particular product and what the consumer is actually paying for that product. It 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 on the other hand is the amount the seller is willing to sell a particular product and what the producer is getting paid for that product. Producer Surplus is the amount that producers benefit by selling at a market price that is higher than the least that they would be willling to sell for. The sum total of Producer Surplus and Consumer Surplus is the Social Surplus.

So, Social Surplus = Producer Surplus + Consumer Surplus

Consumer Surplus = Social Surplus - Producer Surplus

In the diagram below, DD is the Demand Curve, SS is the Supply Curve, E is the Equilibrium Point. The area below the demand curve and above the equilibrium price is the consumer surplus. The area above the supply curve and below the price is the producer surplus. The total area of the consumer surplus and the producer surplus is the social surplus.