Compare the areas before and after the change.
Consumer surplus is buyers' willingness to pay above the price paid, summed over units bought. Producer surplus is the price received above the minimum supply price, summed over units sold. On a simple competitive diagram, use the demand curve, supply curve, actual transaction price and traded quantity for each situation. When a curve shifts, both the boundaries and the traded quantity can change. A lower price with unchanged demand increases consumer surplus; a higher price with unchanged supply increases producer surplus. For the side whose curve shifts, do not infer the surplus change from price or quantity alone. Recalculate or compare the relevant areas.
- Consumer surplus
- Below demand and above the price paid, up to the quantity bought.
- Producer surplus
- Above supply and below the price received, up to the quantity sold.
- Compare both situations
- Use each situation's curves, price and traded quantity; a shifted curve changes the area too.
What a surplus comparison can establish
Unchanged demand
An outward supply shift lowers price and increases quantity under ordinary slopes. With the same demand curve, consumer surplus increases. Producer surplus requires the new supply curve too.
Unchanged supply
An outward demand shift raises price and quantity. With the same supply curve, producer surplus increases. Consumer surplus requires the new demand curve too.
Areas and units
Use half x base x height only for triangular areas bounded by straight lines. If quantity is units per day and price is dollars per unit, the surplus is dollars per day. A curved boundary needs the appropriate area calculation instead.
Surplus versus profit
Variable costs change with output, such as materials used to make extra units. Fixed costs, such as rent under an existing contract, do not change with output during the period considered. In the standard competitive cost interpretation, producer surplus is revenue minus variable costs. Profit also deducts fixed costs. Neither type of surplus means unsold stock.
Welfare qualification
Consumer plus producer surplus measures gains to these market participants in the simple diagram. External effects and distribution matter when making a wider social-welfare judgement; market clearing alone does not establish fairness or social efficiency.
| Measure | Before | After |
|---|---|---|
| Price per kit | $8 | $6 |
| Kits sold | 6 | 8 |
| Consumer surplus | $18 | $32 |
| Producer surplus | $18 | $16 |
| Total surplus | $36 | $48 |
| Revenue | $48 | $48 |
Worked example: More output does not guarantee more producer surplus
Consider an untaxed market for craft kits, with price in dollars per kit and quantity in kits per day. Demand meets the price axis at $14; this point is its price-axis intercept. Initial supply meets that axis at $2. Initially P = $8 and Q = 6. A production improvement makes the supply line flatter while keeping its $2 intercept, so more can be supplied at each price above $2. The new equilibrium is P = $6 and Q = 8. Demand is unchanged. All curves are straight over the relevant range.
- Initial consumer surplus is the triangle below demand and above $8: 1/2 x 6 x ($14 - $8) = $18 per day. Initial producer surplus is above initial supply and below $8: 1/2 x 6 x ($8 - $2) = $18 per day.
- New consumer surplus is 1/2 x 8 x ($14 - $6) = $32 per day. Existing purchases cost less and buyers gain surplus on additional purchases. Consumer surplus rises by $14 per day.
- Use the new supply curve for the new producer surplus: 1/2 x 8 x ($6 - $2) = $16 per day. Producer surplus falls by $2 even though quantity sold rises. The lower price and changed supply curve both matter.
- Total surplus rises from $36 to $48 per day in this diagram. Revenue is $8 x 6 = $48 initially and $6 x 8 = $48 afterwards. Revenue, producer surplus and total surplus are different measures.
- This is one specified supply change, not a universal result. A different outward shift could raise producer surplus. Without the relevant curves or enough numerical information, do not conclude its direction just from higher output.
Watch out for this
If a supply increase lowers price, consumer surplus rises and producer surplus must fall.
With demand unchanged, consumer surplus rises. The producer-surplus change depends on the new supply curve and equilibrium: the price effect and changes in costs and sales must be considered together. Draw or calculate the before-and-after areas.
Check your understanding
Demand increases and the upward-sloping supply curve stays unchanged. Equilibrium price and quantity rise. Which surplus conclusion is justified without specifying the new demand curve?
- Consumer surplus must fall because price rises.
- Producer surplus must fall because costs rise with output.
- Producer surplus rises; compare the two demand curves to determine the consumer-surplus change.