AP® Microeconomics review sheet from Aim for Five (aimforfive.com/micro/units/2/2-6)
Unit 2 · Topic 2.6
2.6 Market Equilibrium and Consumer and Producer Surplus
Equilibrium is where the supply and demand curves cross, so quantity demanded equals quantity supplied. Consumer and producer surplus measure what buyers and sellers gain from trading. In a competitive market with no market failures, equilibrium makes total surplus as large as possible.
Key terms
- equilibrium price
- equilibrium quantity
- consumer surplus
- producer surplus
- total surplus
- allocative efficiency
Market equilibrium
On a graph with price on the vertical axis and quantity on the horizontal axis, draw a downward-sloping demand curve and an upward-sloping supply curve. They cross at one point. The price at that point is the equilibrium price (Pe), and the quantity is the equilibrium quantity (Qe).
At Pe, every buyer who wants to buy at that price can, and every seller who wants to sell at that price can. Nothing pushes the price up or down. The market 'clears'.
If you're given equations or a table, find the price where quantity demanded equals quantity supplied.
Consumer surplus
Consumer surplus is the difference between what a buyer is willing to pay and what they actually pay. If you'd pay up to $10 for a phone case and it costs $6, your consumer surplus is $4.
On the graph, the demand curve shows how much each buyer values each unit. Consumer surplus for the whole market is the area below the demand curve and above the market price, from zero out to the quantity bought. With straight-line curves it's a triangle: ½ × base × height, where the base is the quantity and the height is the gap between the demand curve's price-axis intercept and the market price.
Producer surplus
Producer surplus is the difference between the price a seller receives and the lowest price they'd accept, which reflects their cost of making the unit. If it costs a seller $3 to make a phone case and she sells it for $6, her producer surplus is $3.
On the graph, producer surplus is the area above the supply curve and below the market price, from zero to the quantity sold. With straight-line curves it's also a triangle.
Total surplus and allocative efficiency
Total surplus (also called social surplus) = consumer surplus + producer surplus. It's the total gain to society from the market.
In a perfectly competitive market with no externalities, total surplus is largest at the equilibrium quantity. Every unit up to Qe is valued by some buyer at more than it costs some seller to make, so trading it adds surplus. Any unit past Qe would cost more to make than buyers value it, so producing it would subtract surplus.
When total surplus is as large as possible, the market is allocatively efficient: it's producing the quantity society values most. At that quantity, the value buyers place on the last unit equals the cost of making it. Any change that moves quantity away from Qe creates deadweight loss, the surplus that's lost. You'll see that in topics 2.8 and 2.9.
Worked examples
Try each one yourself first, then open the solution.
- Example 1Calculator allowed
Equilibrium and surplus from a graph described in words
Price is on the vertical axis and quantity on the horizontal axis. The demand curve is a straight line from a price of $12 at zero quantity down to zero price at 120 units. The supply curve is a straight line starting at a price of $2 at zero quantity and rising $1 for every 15 units. The curves cross at a price of $6 and a quantity of 60. Find consumer surplus, producer surplus and total surplus.
Show the solutionHide the solution
- Step 1: Check the equilibrium: demand at 60 units is $12 − 60 ÷ 10 = $6, and supply at 60 units is $2 + 60 ÷ 15 = $6. Both give $6.
- Step 2: Consumer surplus is the triangle below demand and above $6, from 0 to 60: ½ × 60 × ($12 − $6) = $180.
- Step 3: Producer surplus is the triangle above supply and below $6, from 0 to 60: ½ × 60 × ($6 − $2) = $120.
- Step 4: Total surplus = $180 + $120 = $300.
Answer: Consumer surplus $180, producer surplus $120, total surplus $300.
- Example 2Calculator allowed
Consumer surplus from a table (classic trap)
Four buyers each want one ticket. Their maximum willingness to pay is $10, $8, $6 and $4. The price is $5. How many tickets are bought, and what is total consumer surplus?
Show the solutionHide the solution
- Step 1: Only buyers willing to pay at least $5 buy: the $10, $8 and $6 buyers. The $4 buyer doesn't buy.
- Step 2: Consumer surplus for each buyer = willingness to pay − price: $10 − $5 = $5, $8 − $5 = $3, $6 − $5 = $1.
- Step 3: Total consumer surplus = $5 + $3 + $1 = $9.
- Step 4: The trap: including the $4 buyer and subtracting $1. Someone whose value is below the price doesn't buy, so they have no surplus (not negative surplus).
Answer: 3 tickets; consumer surplus = $9.
Common mistakes
- Putting consumer surplus below the price or producer surplus above it. Consumer surplus is between demand and price; producer surplus is between price and supply.
- Forgetting the ½ when finding the area of a triangle.
- Using the whole market's intercepts when the quantity traded is less than equilibrium. Surplus areas stop at the quantity actually bought and sold.
- Saying equilibrium is efficient in every case. It maximizes total surplus only when there are no externalities or other market failures.
On the exam
- Free-response questions often ask you to describe a supply-and-demand graph, label Pe and Qe, and identify or shade consumer or producer surplus. Name the area by its boundaries: 'below demand, above price, from 0 to Qe'.
- Expect area calculations with straight-line curves; write ½ × base × height with the actual numbers.
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Check yourself
2 questions on 2.6 Market Equilibrium and Consumer and Producer Surplus. Pick an answer to see if you got it, and why.
Ana is willing to pay up to $50 for a jacket. She buys it on sale for $35. Ana's consumer surplus from the jacket is
A farmer would be willing to sell a bushel of apples for as little as $12, which covers her cost. She sells it at the market price of $20. Her producer surplus on this bushel is
0 of 2 answered