Consumer Surplus vs Producer Surplus
Consumer surplus and producer surplus are terms that are used hand in hand to explain the benefits that exist for a consumer and producer when buying and selling goods in a market place. Consumer surplus is the benefit available to the consumer and producer surplus is the benefit available to the producer. The article below explains the two terms, how they can be shown graphically on a demand and supply curve and highlights the similarities and differences in the two concepts.
What is Consumer Surplus?
Consumer surplus serves as an important tool to measure customer satisfaction. Consumer surplus refers to the difference between the maximum amount that an individual is willing to pay for a good or service and the amount that is actually paid. The total amount that is actually paid by the customer is the market price for the product and the amount that they are willing and to pay will be shown through the demand curve. The consumer surplus will be shown graphically through highlighting the space above the market price (what they actually pay) and below the demand curve (what they are willing to pay).
Consumer surplus gives the consumer the idea that he is paying less for a product for which he is willing to spend more, which results in customer satisfaction. For example, a consumer is willing to pay $800 for a laptop. However, he finds out that the laptop is on seasonal discount and, therefore, he can purchase it at a lower price for $600. The difference between $800 (point on the demand curve) and $600 (market price), $200 will be the consumer surplus.
What is Producer Surplus?
Producer surplus shows the difference between the minimum amount for which a producer is willing to sell his products and the price at which the product is actually sold for. The price for which the product is actually sold is the market price and the minimum price for which the producer can sell the product will be on the supply curve. The producer surplus can be shown graphically and will be the area below the market price point and above the supply curve.
Having a producer surplus is beneficial to the producer because producers are able to sell the products/services at a price higher than the minimum price for which they are willing to sell. For example, a producer of umbrellas is willing to sell one umbrella for a minimum of $2 (supply curve). However, the rainy season results in a higher demand for umbrellas and so now the producer can sell them for a higher price at $3 per unit (market price). The difference $1 will be the producer surplus.
Consumer Surplus vs Producer Surplus
The producer surplus and consumer surplus are terms closely related to one another in that they both show the economic value to a producer in selling goods and services, and to a consumer in purchasing goods and services. Regardless of the fact that the two concepts go hand in hand, they are quite different to one another as the producer surplus looks at the gain that the producer obtains and consumer surplus looks at the gain that the consumer obtains. If there is a consumer surplus this shows the goods are sold a price lower than the maximum the consumer is willing to pay (resulting in customer satisfaction) and a producer surplus shows that goods are sold at a price higher than the minimum price that the producer is willing to accept for his products (higher sales for producer).
Summary:
• The producer surplus and consumer surplus are terms closely related to one another in that they both show the economic value to a producer in selling goods and services, and to a consumer in purchasing goods and services.
• Consumer surplus refers to the difference between the maximum amount that an individual is willing to pay for a good or service and the amount that is actually paid.
• Producer surplus shows the difference between the minimum amount for which a producer is willing to sell his products and the price at which the product is actually sold.