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What Are Consumer And Producer Surplus?

Referencing Styles : APA | Pages : 1
  • Course Code: ECON910
  • Course Title: What Are Consumer And Producer Surplus?
  • University: London Metropolitan University
  • Country: GB

Consumer surplus and producer surplus is an economic term which is used for stating the relevant economic terminology. The consumer surplus occurs whenever and individually pays less than what they are prepared to pay for a particular product. The consumer surplus directly revolves around an adequate demand curve, which indicates that the price consumers are prepared to pay for a quantity of a good is directly based on the expectation of the private benefit that could be generated from the transaction. Therefore, the consumer surplus occurs when an individual pays a low amount for the product in comparison to the initial amount.

Moreover, the consumer surplus is intended to decline in time when the relevant consumptions from the buyers increase. Therefore, it could be understood that the decline in consumer surplus occurs when individuals start to increase the consumption of the relevant product. This directly explains the law of diminishing marginal utility, which indicates that the first unit of goods and services consumed, generates much greater utility than the second one. Hence, the first payment is relatively made to subdue the thirst of the consumers where they are ready to pay a relatively high price for the overall product. Thus, it could be understood that the consumer surplus increases in the first purchase that is conducted by the consumer, which relatively reduces with the increment in consumptions by the consumer.

Producer surplus is the additional private benefits to the producers that are provided in terms of profits and the price they receive in the market is relatively more than the anticipated value. The producer’s surplus is conducted when the demand for the product is relatively high in the market while the overall supply is limited. In this instance, the producer relatedly receives a reward that is more than and the amount that covers the overall cost of production. This producer surplus is relatively reduced in time when the overall supply of the product increases or the demand from the consumer decreases in time due to the impact of the law of diminishing marginal utility.

 Therefore, it is detected that the producer surplus is the overall difference between the lowest prices a producer would be willing to accept the market price. This difference directly causes the producer to incur a higher level of profits from their operations due to the increasing market price of the product. However, a similar instance is witnessed for the consumer surplus, as it is the difference between the highest price a consumer is willing to pay for the actual market price of the goods or services. Thus, both consumer surplus and producer surplus is affected by the law of diminishing marginal utility, which reduces the consumers’ willingness to provide premium prices for the products and reduces the high level of profits generated by the producers. Therefore, it is detected that the economic surplus only occurs when the overall consumer surplus is added to the producer’s surplus.

Describe in detail using examples:

Consumer surplus example:

The above figure provides information about the overall formula for calculating the consumer surplus, which is ½ base x height. The consumer surplus is positive when consumers are willing to pay more than the market price of a particular product. The above figure directly highlights the formula and the measurement that can be conducted to identify the overall consumer surplus of a product. The above graph indicates that the market price for the overall quantity demanded is at the levels of $18, while the consumers are willing to pay a price of $30, while the overall units that produced are at the levels of 20. This mainly makes the consumer surplus at the levels of $120, where the formula is 1/2x(20)x[(30-18]. Therefore, it is detected that the total consumer surplus is mainly at the levels of $120, as per the relevant calculations.

One of the major Examples for consumer surplus is the demand for water among consumers who are thirsty on a sunny day. the first glass of lemon water that is provided by the producer can have a higher amount of price, as the consumers are willing to give high value to the product to satisfy their current needs. However, after drinking one glass of lemon water the consumer starts to reduce the level of price that they are willing to pay for the same product. Hence, increment in consumption directly reduces the price of lemon water as the thirst of the consumers has been satisfied. The example directly satisfies the law of diminishing marginal utility where consumers’ willingness to pay a premium price for a particular product declines with the increment in consumption.

Producer surplus example:

The above figure provides information about the producer surplus calculation that has been adapted for identifying the total surplus value that has been generated from a particular example. The consumer surplus also uses a similar method for detecting the overall values, where the formula is ½ base x heights. Devaluation directly indicates that the overall market price for the quantity supplied by the producer is at the levels of $25 for 20 units. However, $5 is considered the minimum price that the producer is willing to accept for single unit office goods. This directly indicates that the overall base for the producer’s surplus is at the levels of $20, where the total producer surplus amount is $200 for the example. The formula 1/2x(20)x[(25-5] is mainly used for detecting the overall $200 producer surplus, which is depicted in the above figure.

One of the adequate examples for producer surplus is coffee as it is essentially the same across all producers. However, the price of a cup of coffee can widely vary depending on where it is sold as the price for coffee can drastically increase for Starbucks in comparison to McDonald's as drinkers have a strong preference regarding where to buy the coffee drinks. Thus, the difference between the lowest available price for the coffee cup and the highest price is the producer surplus for the coffee reduces. Hence, coffee lovers are willing to pay more for the same service due to the strong preference they have for the love of coffee.

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