Consumer and Producer Surplus

Say you were willing to pay $28 for a hoodie and the price turns out to be $20. You keep the $8 difference -- that gap between what you were willing to pay and what you actually paid is your consumer surplus (the net benefit a buyer receives from a transaction, equal to willingness-to-pay minus the price). The seller on the other side would have accepted $15 but received $20, so they pocket a $5 producer surplus (the net benefit a seller receives, equal to the price minus the minimum they would have accepted).

These are not accounting abstractions. Every transaction in a competitive market creates value for both sides simultaneously, and the triangle areas on a supply-and-demand diagram measure exactly how much. Add them together and you have total surplus -- the total net benefit the market generates for all participants.

Both surplus areas are right triangles, so the area is half the base times the height. For consumer surplus, the height is the distance from the choke price $P_{\text{choke}}$ down to the equilibrium price $P^*$. The choke price is where demand hits the price axis -- set $Q_d = 0$ and solve: for demand $Q_d = a - bP$ that gives $P_{\text{choke}} = a/b$, which is $100/2 = 50$ here.

For producer surplus the height runs from $P^*$ down to $P_{\min}$, the minimum price at which any output would be offered -- the supply curve's intercept on the price axis. For supply $Q_s = c + dP$ with $c < 0$, setting $Q_s = 0$ gives $P_{\min} = -c/d$, which is $20/4 = 5$ here.

With $P_{\text{choke}} = 50$, $P_{\min} = 5$, $P^* = 20$, and $Q^* = 60$, the numbers work out to values you can verify in your head:

The three metrics below update in real time as you adjust the demand and supply parameters. Watch how a change in one curve shifts the balance between what buyers and sellers capture.