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Consumer Surplus and the Demand Curve. Willingness to pay and the demand curve. Definition Willingness to pay refers to the maximum price at which he or she would buy a good The net gain that a buyer achieves from the purchase of a good is called individual consumer surplus.
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Willingness to pay and the demand curve • Definition • Willingness to pay refers to the maximum price at which he or she would buy a good • The net gain that a buyer achieves from the purchase of a good is called individual consumer surplus. • Whenever a buyer pays a price lower than his or her willingness to pay, the buyer achieves some individual consumer surplus
The sum of the individual consumer surpluses achieved by all buyers of a good is the total consumer surplus. • Economist use the term consumer surplus to refer to both individual and total consumer surplus • Graphically the total consumer surplus generated by purchase of a good at a given price is equal to the area below the demand curve but above the price.
Producer surplus and the supply curve • Cost and producer surplus • The lowest price at which a potential seller is willing to sell is called the seller’s cost. • Individual producer surplus • Is the net gain to an individual seller from selling a good. It is equal to the difference between the price received and the seller’s cost
Total producer surplus • Is the sum of the individual surpluses of all the sellers of a good in a market • Economist use the term producer surplus to refer to both individual and total producer surplus • Graphically the total producer surplus from sales of a good at a given price is the area above the supply curve but below that price.
