Consumer surplus, producer surplus, and deadweight loss

Consumer surplus is the difference between the most a buyer would be willing to pay for something and the price they actually pay: if you would pay up to $10 for a concert ticket and buy it for $6, your consumer surplus is $4. Producer surplus is the difference between the price a seller receives and the lowest price they would have accepted, which reflects their cost of producing it. This kind of surplus measures benefit; it is not the same as a surplus of unsold goods when the price is above equilibrium. On a supply and demand graph, consumer surplus is the area below the demand curve and above the price, and producer surplus is the area above the supply curve and below the price. Together they make up total surplus, the total benefit a market creates for buyers and sellers. In a competitive market with no externalities, total surplus is largest at the equilibrium price and quantity, which is why economists call that outcome efficient. Policies that push the quantity traded away from equilibrium, like a binding price ceiling, a binding price floor, or a tax, shrink total surplus; the surplus lost from trades that would have benefited both sides but no longer happen is called deadweight loss. Total surplus measures efficiency, not fairness, so it cannot say on its own whether an outcome is fair.

This explanation is AI-generated and can occasionally be wrong. 🚩 Report