Consumer demand for a good varies with the price. Typically, consumers are willing to pay more for the good if they must, rather than do without. The difference between what consumers are willing to pay and what they have to pay is called consumer surplus. Likewise, producers will supply a given quantity of a good at a particular price. The price producers actually receive is usually more than the minimum they are willing to accept. The difference between the minimum payment producers will accept and what they actually get is the producer surplus. Consumer and producer surpluses are more than abstract economic theory. Suppose you are willing to pay $10 for a pound of coffee, but you can buy it for $7. The $3 difference is consumer surplus you can use to buy cream for the coffee, which is a real-world benefit.

Calculating Consumer Surplus

Calculate how much consumers actually pay for a good. Multiply the price by the demand. Suppose consumers buy 10,000 pounds of coffee when the price is $7 per pound. The total amount consumers pay comes to $70,000.

Compute the amount consumers are willing to pay for a good. At some very high price, producers would sell just one unit, because only one person would be willing to buy at that price. At a slightly lower price producers would sell a few more units. As the price decreases, demand grows. Suppose producers can sell one pound of coffee at $200 per pound. At lower prices, more consumers will buy coffee. At $7 per pound, a consumer willing to pay that price but no more will buy coffee. If demand has reached 10,000 pounds, that consumer buys the 10,000th pound. Other buyers are still willing to pay more for coffee, but they don’t have to. Add up the prices consumers are willing to pay for each pound of coffee. To keep it simple, assume the average consumer is willing to pay $10 per can. For 10,000 cans this comes to $100,000.

Subtract the total paid by consumers from the price they are willing to pay to calculate consumer surplus. If consumers are willing to pay an aggregate total of $100,000 for 10,000 pounds and actually pay $70,000, consumer surplus equals $30,000, or $3 per pound.

Calculating Producer Surplus

Calculate the total amount producers actually receive for supplying consumer demand at a given price. Multiply price by number of units. If producers supply 10,000 pounds of coffee at $7 per pound, the total amount they receive equals $70,000.

Compute what producers are willing to accept to supply a given amount of a good. If the price is very low, producers will supply only a few units. As the price increases, producers will supply more. For instance, at $1 per pound producers might supply only 100 pounds of coffee. At $7 per pound, they will supply 10,000 pounds. Producers will only supply the 10,000 can if they can get $7 for it. However, they are still willing to accept less for the first 9,999 pounds, but they don’t have to. Assume the minimum producers will accept for the 10,000 pounds of coffee averages $5 per pound, or $50,000 for 10,000 pounds.

Calculate the producer surplus by subtracting the amount producers are willing to accept from the amount they actually get. If producers are willing to accept $50,000 for 10,000 pounds of coffee and the total they receive is $70,000, the producer surplus comes to $20,000, or $2 per pound.

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