Consumer surplus is the area below demand curve and above equilibrium price.
Producer surplus is the area above demand curve and below equilibrium price.
Before trade
The equilibrium price where domestic demand equals domestic supply is $240 per pound. The equilibrium quantity is 250,000 tons.
Consumer surplus
Area of triangle = ½ x base x height
= ½ x (250-0) x (440-240)
=1/2 x 250 x 200= 1/2 x 50,000= $25,000.
Producer surplus
Area of triangle = ½ x base x height
= ½ x (250-0) x (240-0)
=1/2 x 250 x 240= 1/2 x 60,000= $30,000.
Total surplus= Consumer surplus + Producer surplus
= $25,000 + $30,000= $55,000.
After trade
Quantity supplied= 100 tons
Quantity demanded= 400 tons
Imports is quantity demanded – quantity supplied=300 tons
Consumer surplus
Area of triangle = ½ x base x height
= ½ x (400-0) x (440-120)
=1/2 x 400 x 320= 1/2 x 128,000= $64,000.
Producer surplus
Area of triangle = ½ x base x height
= ½ x (100-0) x (120-40)
=1/2 x 100 x 80= 1/2 x 8,000= $4,000.
Total surplus= Consumer surplus + Producer surplus
= $64,000 + $4,000= $68,000.
With Free trade ($) |
Without free trade ($) |
|
Consumer surplus |
$64,000 |
$25,000 |
Producer surplus |
$4,000 |
$30,000 |
With free trade, consumer surplus increases by $64,000 - $25,000= $39,000. Producer surplus decreases by $30,000 - $4000=$26,000.
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