A) The distinction between consumer and producer surplus

Consumer surplus is the difference between what consumers are willing and able to pay for a good or service and the price that they actually pay.

Producer surplus is the difference between the price at which producers are willing and able to supply a good or service and the price that they actually receive.

B) Consumer and producer surplus on a diagram

Consumer surplus is the area below the demand curve and above the equilibrium price. It represents consumers who would have been willing and able to pay more than the market price.

Producer surplus is the area above the supply curve and below the equilibrium price. It represents producers who would have been willing and able to supply the good or service at a lower price than the market price.

C) How changes in supply can affect consumer surplus

A change in supply can alter both the equilibrium price and quantity and therefore change the amount of consumer surplus in the market.

Decrease in supply

When supply decreases, there is upward pressure on the market price and the equilibrium quantity falls. The higher price means that fewer consumers are willing and able to buy the good and the area of consumer surplus decreases.

What the full guide adds

For this topic, the full AS guide also covers:

• How an increase in supply affects consumer surplus, including the resulting fall in price and rise in quantity.
• How a decrease in demand affects producer surplus and why a lower market price reduces the surplus received by producers.
• How an increase in demand affects producer surplus as equilibrium price and quantity rise.
• Additional supply and demand diagrams showing how the consumer and producer surplus areas change after each shift.
• Fuller explanations of the link between changes in equilibrium price and quantity and changes in consumer or producer surplus.