Question

What is total surplus? How is it illustrated on a demand and supply diagram?

Short answer

Total surplus represents the sum of consumer surplus and producer surplus in a market. Consumer surplus is the difference between the maximum amount consumers are willing to pay and the actual amount they pay, whereas producer surplus is the difference between the minimum amount producers are willing to accept and the actual amount they receive. On a demand and supply diagram, consumer surplus is illustrated by the area between the demand curve and the equilibrium price, while producer surplus is illustrated by the area between the supply curve and the equilibrium price. Total surplus is represented by the combined area of these two triangles, reflecting the overall benefit that both consumers and producers receive from participating in the market.

Step-by-step solution

Definition of Consumer Surplus

Consumer surplus is the difference between the maximum amount a consumer is willing to pay for a good or service and the actual amount they pay. It represents the benefit consumers receive from purchasing a good or service at a price below their maximum willingness to pay.

Definition of Producer Surplus

Producer surplus is the difference between the minimum amount a producer is willing to accept for a good or service and the actual amount they receive. It represents the benefit producers receive from selling a good or service at a price above their minimum willingness to accept.

Definition of Total Surplus

Total surplus is the sum of consumer surplus and producer surplus, and it represents the overall benefit that both consumers and producers receive from participating in a market.

Demand and Supply Diagram

A demand and supply diagram is a graphical representation of the relationship between the quantity of a good or service demanded by consumers (demand) and the quantity supplied by producers (supply) at any given price level. It is used to help understand market equilibrium and how consumer surplus, producer surplus, and total surplus are determined.

Illustrating Consumer Surplus on the Demand and Supply Diagram

To illustrate consumer surplus on the demand and supply diagram, we first identify the demand curve, which shows the willingness of consumers to purchase different quantities of a good at various prices. Next, we find the equilibrium price, which is the price at which the quantity demanded equals the quantity supplied. Consumer surplus is represented by the area between the demand curve and the equilibrium price, which forms a triangle.

Illustrating Producer Surplus on the Demand and Supply Diagram

To illustrate producer surplus on the demand and supply diagram, we first identify the supply curve, which shows the willingness of producers to supply different quantities of a good at various prices. The equilibrium price is found as mentioned above. Producer surplus is represented by the area between the supply curve and the equilibrium price, which forms another triangle.

Illustrating Total Surplus on the Demand and Supply Diagram

Having illustrated consumer surplus and producer surplus individually, we can now illustrate total surplus on the demand and supply diagram. Total surplus is simply the sum of consumer surplus and producer surplus. Graphically, this means that the total surplus is represented by the area of both triangles formed by the consumer surplus and the producer surplus combined. This area represents the combined benefit both consumers and producers receive from participating in the market.