Main Difference – Consumer Surplus vs Producer Surplus
In any market everyone expects surpluses, not losses; thus, the surplus is an important factor in an economy. It is kind of welfare in which both producers and consumers can gain a surplus. Consumer surplus is the maximum amount that a consumer is willing to pay for a product minus the price he actually pays. It reflects the amount of utility or gain customers receive when they buy products and services. Producer surplus is the amount of benefit received by a business when it sells a product or a service. In other words, producer surplus can be described as the difference between the actual price and the lowest amount a company would accept for a product. This is the main difference between consumer surplus and producer surplus.
This article covers,
1. What is Consumer Surplus? – Definition, Characteristics
2. What is Producer Surplus? – Definition, Characteristics
3. What is the difference between Consumer Surplus and Producer Surplus?
What is Producer Surplus
Producer surplus is a measure of producer welfare. In simple terms, it is the benefit received by the producer for selling goods in the market. This can be measured by taking the difference between what producers are willing and able to supply and the price they actually receive for a particular product. Producer surplus is generated when the producer is willing to sell their goods at a lower price, and buyers are willing to accept the goods at a higher price. This excess demand creates an excess welfare.
The surplus is the area below the market price and above the supply curve. If a producer had the ability to sell goods for the maximum price or can price discriminate perfectly and the consumer is willing to pay that amount for the good, then the producer can capture the entire economic surplus. Here, the producer surplus would equal overall economic surplus.
Read More: How to Calculate Producer Surplus
What is Consumer Surplus
Consumer surplus is a measurement of consumer welfare. Consumer surplus refers to the maximum amount that a consumer is willing to pay for a product minus the price he actually pays. The amount of utility or gain that the customers receive when they buy products and services can be measured accordingly. The increase in price will reduce the consumer surplus and decrease in price will increase consumer surplus. This is the area above the market price curve and below the demand curve.
Both Producer surplus and consumer surplus equals overall economic surplus or the benefit provided by producers and consumers act together in a free market.
Similarities Between Consumer Surplus and Producer Surplus
- Both consumer and producer surplus has a negative relationship with price
- Both are welfare of their own party
Difference Between Consumer Surplus and Producer Surplus
Consumer Surplus: Consumer surplus is defined as the difference between the lowest price that a producer is willing to accept and the market price.
Producer Surplus: Producer surplus is defined as the difference between the highest price that the consumer is willing to pay and the market price.
Decrease in Price
Consumer Surplus: When price decreases consumer surplus increase up to a certain point below the equilibrium price.
Producer Surplus: When price decreases the producer surplus increases.
Consumer Surplus: This is consumer’s welfare.
Producer Surplus: This is producer’s welfare.
Consumer Surplus vs Producer Surplus – Conclusion
The goal of setting a business is earning surpluses. The surplus is a concept that describes the amount of value or utility that consumers and producers receive while making transactions. Every producer and consumer aim to gain utility by increasing the surplus. When a company has a large amount of surplus, the cash is flowing into the company, and this surplus can be invested in new products, equipment services, and employees to facilitate growth. A business that has low surplus may not have the cash flow necessary for financial growth. So both producer and consumer surpluses play an important role in an economy to develop a country and improve the living standard through expanding the businesses.