Consumer Surplus refers to an economic measure that indicates the level of welfare people in an economy gain from exchange of goods and services, or an indicant of consumer satisfaction. Its use is to highlight the difference in price that the customer is willing to meet for a good, and the actual market price for the good. Calculation is by obtaining the total that consumers are willing to pay for a good (derived from the demand curve) and subtracting from it the total of the actual amount paid (market price). Perfect elasticity of demand for a good or service returns a consumer surplus of zero because customers pay the exact price they initially sought out to pay for such. This phenomenon usually takes place in a highly competitive market where firms are price takers. Perfect inelastic demand returns an infinite consumer surplus. This leads to a stagnation of quantity demanded irrespective of the price.
Producer Surplus refers to an economic measure that indicates the level of producer welfare in a competitive market. Its use is to highlight the difference in price that producers are willing to supply a good, and the actual price they supply it.
Economic Surplus refers to the total benefit players in a competitive market receive on goods and services, given a provision of quantity and price. It is the total of consumer surplus and producer surplus in an economy.
Economic Surplus and Efficiency
Economic efficiency refers to how well an economy produces goods and services given the constraint of scarce resources. For an economy to trump another in efficiency, it should produce more goods and services, given an equal allotment of resources to both. If there is a great amount of economic surplus, where consumers and suppliers attain maximum welfare from the market, then economic efficiency is at its highest. This is because the greatest amount of economic surplus leads to maximization of utility to market players, which then means that economic efficiency heightens due to the lack of wastage in it. Economic surplus is also an indication of optimum competitive equilibrium, and thus an indicant of efficiency in the market.
This concept will arise when there is a loss of efficiency in the economy, which causes disequilibrium in competition. Deadweight loss in an economy also reduces economy surplus. It may also be termed as excess burden. Monopoly pricing, price ceilings or floors, and taxes are some of the main causes of excess burden.
Price Ceiling and Tax
A price ceiling is a legal upper limit, set by governments, for the price of a good. For it to be effective, a price ceiling must be set below the market equilibrium price. This will inherently cause an inefficiency in the market because there will be a rise in demand for the product as it is below equilibrium price. There will also be a drop in supply due to the reluctance by suppliers to sell their products at a lower price. This will cause an artificial shortage on supply of goods. A deadweight loss will also arise due to market inefficiencies arising because of disequilibrium.
Tax on a product will raise the supply schedule for the product by the tax amount, and sellers will try to account for this by laying the extra costs on the consumer. As a result, the equilibrium price will rise. This ultimately leads to a deadweight loss from units not sold.
A recent example of the inefficiencies brought about by a price ceiling is the collapse of Energy One, an Australian electricity distributor. During periods of generator use, their running costs rose significantly, yet they were unable to adjust this into their price. This led to higher costs as opposed to revenues. This clearly illustrates the effect a price ceiling can have.
An example of a price floor is the minimum wage set in The United States of America. A price floor is the lowest minimum price, and this is the main of structural unemployment. This is because there are many people willing to work for lower than the minimum wage. However, the law restricts them from offering their services for less than the market price. A price floor is effective if set higher than the equilibrium price.