Consumer and producer surplus are a way of evaluating market efficiency and deadweight loss created by either market structure such as monopoly or imposition of government policies including taxes, price floors, and price ceilings.

According to our readings, consumer surplus is defined as the difference between what consumer is willing and able to pay for a good or service and market price (Butters & Asarta, 2019).

To understand consumer surplus, it is important to remember market demand for a product is the horizontal summation of all individual consumers demand.Not all people will enjoy consumer demand and not all consumers will purchase the product in the first place when market price is higher than they are willing to pay.

Consumer surplus is that wonderful feeling people get when they purchase something on sale and think what a great bargain they got.These consumers were willingto pay much more for the good but only had to pay market price.On a supply and demand diagram, consumer surplus can be illustrated by shading in the area above market price and below the demand curve.All consumers on the market demand curve located above the market price will enjoy varying degrees of consumer surplus.Their demand is such that they were willing and able to pay more for the product, but only had to pay marketprice.The consumer with the highest demand for the product will enjoy maximum consumer surplus and consumers who think the item is only worth current market price will not enjoy consumer surplus at all.

Producer surplus rewards firms for being more efficient than other producers.Producer surplus is measured below market price and above the supply curve (Butters & Asarta, 2019).

Firms only supply goods and services to markets when they can make profits or minimize short-run losses.Eventually, firms will go out of business if they can't cover costs and make a profit.Therefore, supply curve illustrates those firms that can earn profits at each price level.

Producer surplus shows those firms that can earn a profit below market price.These firms would be willing to offer product at much lower prices, but they charge market prices and have the potential to produce more and earn more total profit relative to other firms.

If nothing restricts supply and demand, market price and quantity will be allocatively and technically efficient provided all marginal costs and benefits are considered, assuming no positive or negative externalities.Consumer and producer surpluses are fully allocated.In a supply and demand diagram, consumer surplus is a complete shaded area above market price and below market demand.Producer surplus is a complete shaded area below market price and above market supply.There is no deadweight loss to society.In other words, there is no missing shaded area between supply and demand.

Can students think of an experience where consumer surplus was evident while purchasing something in the store or online? Finding toilet paper for the first time since the beginning of the pandemic?

Reference

Butters, R. B., & Asarta, C. J. (2019). Principles of economics (2nd ed.). McGraw-Hill.