In order to describe producer and consumer surplus in relation to the supply and demand curve, we have to establish the equilibrium point. After the eq. point is established, a line from the point to quantity and price should be drawn. The producer surplus is represented by the area bounded by the eq. price line and the supply curve, while consumer surplus is represented by the area bounded by the eq. price line and the demand curve. In a simplistic case, the consumer surplus and producer surplus are areas that are represented by the two triangles, and are usually equal.
Example of producer surplus: A seller on Amazon.com decides to sell his textbook. He is willing to accept a price of $20. A student purchases the book for $25; the book seller receives producer surplus worth of $5.
Example of consumer surplus: A shopper is looking for a brand new LCD T.V. He is willing to pay $2,000 for a 72 inch T.V. He finds a T.V. at Tiger Direct for $1800. He receives consumer surplus worth $200.
Oct 17th, 2014
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