Quantitative Analysis of Consumer and Producer Surplus at Equilibrium - Online Tutor, Practice Problems & Exam Prep

To calculate consumer and producer surplus, first determine the equilibrium price and quantity where quantity demanded equals quantity supplied. Use the demand and supply equations to find the demand axis price and supply axis price. Consumer surplus is the area above the equilibrium price and below the demand curve, while producer surplus is the area below the equilibrium price and above the supply curve. The formulas for these areas involve calculating the base and height of the respective triangles formed on the graph, leading to insights on market efficiency and economic welfare.

Quantitative Analysis of Consumer and Producer Surplus

Alright, now let's calculate consumer and producer surplus when we're given equations and we have to use just a little bit of algebra. Let's do it. Alright, so when we're calculating consumer and producer surplus, at least in this video, we're only going to deal with equilibrium. We're going to be at equilibrium calculating consumer surplus, but I just want to point out that in step 1, this is something we've done in a previous video. This is finding the equilibrium price and quantity using a little bit of algebra and we've done that before. I suggest if you don't remember how to do that to watch that video again, but we're going to do it in an example here just to reiterate. Alright? And in step 2, I want to note this term, axis price that I'm using. So find the axis price when quantity demanded equals 0. I made up this term; that's not the real term. That's kind of how I think about it. So let me just show you what I mean over here before we get to the example. I'm going to draw a little example standard supply-demand curve graph, excuse me, a graph over here. So let's say we've got our supply and demand right there, right, and we've got our equilibrium. So this is our price axis, our quantity axis, right? We've got our equilibrium price right here P star and our equilibrium quantity right here Q star, right? and notice that, to calculate our areas of our producer and consumer surplus, so if this is our consumer surplus right here, right, the area below the demand curve, above the market price, this triangle right here, to calculate that we're going to need this price way up here where the demand curve is crossing the axis, and that's what I call the axis price, the demand axis price right there, Right. And then down here, we're also going to be solving when we do our producer surplus, we're going to need this point where the supply curve is crossing the price axis right there, right? This point right here where

The supply and demand curves for a product are as follows. What is consumer surplus in this market? 

Q_D = 15 - 2P
Q_S = -15 + P

• A. 6.25
• B. 12.5
• C. 20
• D. 22.5
• E. 25

The supply and demand curves for a product are as follows. What is producer surplus in this market?

Q_D = 15 - 2P
Q_S = -15 + P 

• A. 6.25
• B. 12.5
• C. 15
• D. 20
• E. 25

Here’s what students ask on this topic:

How do you calculate consumer surplus at equilibrium?

To calculate consumer surplus at equilibrium, first determine the equilibrium price (P*) and quantity (Q*) where quantity demanded equals quantity supplied. Next, find the demand axis price (P_d), which is the price where the demand curve intersects the price axis. Consumer surplus is the area of the triangle above the equilibrium price and below the demand curve. The formula for consumer surplus is:

$\frac{1}{2}\times (P_d-P_{*})\times Q_{*}$

This formula calculates the area of the triangle, giving you the consumer surplus.

What is producer surplus and how is it calculated?

Producer surplus is the difference between what producers are willing to accept for a good or service and what they actually receive. To calculate producer surplus at equilibrium, first determine the equilibrium price (P*) and quantity (Q*). Then, find the supply axis price (P_s), which is the price where the supply curve intersects the price axis. Producer surplus is the area of the triangle below the equilibrium price and above the supply curve. The formula for producer surplus is:

$\frac{1}{2}\times (P_{*}-P_s)\times Q_{*}$

This formula calculates the area of the triangle, giving you the producer surplus.

What is the significance of the equilibrium price and quantity in calculating consumer and producer surplus?

The equilibrium price (P*) and quantity (Q*) are crucial in calculating consumer and producer surplus because they represent the point where the market is in balance, meaning quantity demanded equals quantity supplied. At this point, the consumer surplus is the area above the equilibrium price and below the demand curve, while the producer surplus is the area below the equilibrium price and above the supply curve. These surpluses measure the economic welfare and efficiency of the market, indicating the benefits to consumers and producers from participating in the market.

How do you find the demand and supply axis prices?

To find the demand axis price (P_d), set the quantity demanded to zero in the demand equation and solve for the price. For example, if the demand equation is Q_d = 3,000,000 - 1,000P, set Q_d to 0 and solve for P:

$0=\mathrm{3,000,000}-\mathrm{1,000}P$

Solving this gives P_d = 3,000. Similarly, to find the supply axis price (P_s), set the quantity supplied to zero in the supply equation and solve for the price. For example, if the supply equation is Q_s = 1,300P - 450,000, set Q_s to 0 and solve for P:

$0=\mathrm{1,300}P-\mathrm{450,000}$

Solving this gives P_s = 346.15.

Why is it important to understand consumer and producer surplus in microeconomics?

Understanding consumer and producer surplus is important in microeconomics because these concepts measure the economic welfare and efficiency of a market. Consumer surplus represents the benefit consumers receive from purchasing goods at a price lower than their maximum willingness to pay, while producer surplus represents the benefit producers receive from selling goods at a price higher than their minimum acceptable price. Together, these surpluses help economists evaluate the overall well-being of market participants and the efficiency of resource allocation, providing insights into the impact of policies, market changes, and external factors on economic welfare.