Consumer and producer surplus

Section 1: Understanding Consumer Surplus

Consumer surplus is the economic benefit received by consumers when they are able to purchase a good for a price that is less than the highest price that they would have been willing to pay.
It can be seen as a measure of the welfare that consumers gain from complete exchange.
Graphically, consumer surplus is represented by the area between the demand curve and the price level that the good is being sold at, up to the quantity traded.

Section 2: Understanding Producer Surplus

Producer surplus is the economic gain made by producers when they sell a good for a price that is higher than the lowest price that they would have accepted.
It is a measure of the difference between the actual price of a good or service and the lowest price a producer would have still accepted for a good or service.
Graphically, producer surplus is depicted as the area above the supply curve, below the market price, and up to the quantity of the good that is sold.

Section 3: Implications of Changes in Surplus

Changes in market conditions, such as shifts in supply or demand, can cause the areas of consumer and producer surplus to change, affecting the total welfare in the market.
A fall in consumer surplus can result from an increase in price or a decrease in the quantity of the product demanded. Conversely, an increase in consumer surplus can occur if the price drops or if quantity demanded increases.
A fall in producer surplus can be caused by a drop in price or a decrease in the quantity of the product supplied. Conversely, an increase in producer surplus can occur when the price rises or when quantity supplied increases.

Section 4: Market Efficiency

When a market is in equilibrium, both consumer surplus and producer surplus are maximised, indicating that the market is efficient.
Deadweight loss refers to the loss in total surplus (consumer + producer surplus) that results from a market distortion, such as a tax, subsidy or price ceiling or floor. The presence of a deadweight loss suggests that the market is not operating at its most efficient point.
Policies that aim to redistribute consumer and producer surplus may have unintended consequences on market efficiency and overall societal welfare.