Consumers and producers interact with each other in a market to buy and sell goods and services. Each product has a price and consumers pay its price in order to buy it. Producers set their prices to make a profit. Consumers and producers may derive a surplus from the purchase and sale of products.
If a consumer is prepared to pay as much as $10 to buy a DVD, but is able to buy the DVD for $8, he paid $2 less than he was prepared to. This difference between the price he was willing to pay and the actual price he paid represents a consumer surplus. Each consumer has a different consumer surplus. This is because the maximum price each person is prepared to pay for a product is different, but the product is offered at the same price to everyone.
Similar to consumer surplus, there is the concept of producer surplus in economics. If a producer is willing to accept a price of $6 for a DVD and sells it for $8, the $2 difference represents a surplus for her. Each producer has a different minimum acceptable price, based on cost of production. Thus, each producer’s surplus is different.
Impact on Consumer Surplus
When the supply of a product increases, the consumer is likely to benefit. When supply increases, the consumer’s surplus will increase. With increased supply, price is likely to go down, thereby increasing the consumer’s surplus. This is because as price goes down, consumer surplus goes up.
Impact on Producer Surplus
Conversely, the impact of an increase in supply on the producer’s surplus is not as clear. The effect on the producer’s surplus depends how much of the product the producer can sell at increased levels of supply, even as prices go down. If the producer can sell more of the product at reduced prices, it could result in a higher producer surplus. On the other hand, if demand doesn’t keep up with the supply increases, she could have a reduced surplus.