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Micro Economics

Notes
Figure 6.9: Consumer and Producer Surplus

When OP gets settled as the actual equilibrium price, we can work out the area of:
Consumer’s Surplus: The upper triangle represents the difference between the potential price and
actual price paid by the buyers for all the units between O and Q.
Producer’s Surplus: The lower triangle represents the difference between the potential price and
actual price charged by the supplier for all the units between O and Q.
Note that at Qth unit of output and price P, there is neither consumer’s surplus nor producer’s
surplus. OP is that equilibrium price at which we have zero consumer surplus and zero producer
surplus.

6.5 Summary

Indifference curve shows all combinations of two goods which yield the same level of
satisfaction to the consumer. The consumer is indifferent about any two points lying on
this curve.
Budget line represents different combinations of two goods X and Y which the consumer
can buy by spending all his income.

The indifference curve analysis considers the income effect. Change in the price of
commodity will change the real income position.
Indifference curve also considers the effect of substitution goods.

When the demand price is generally greater than the price actually paid, most consumers
under most circumstances receive some surplus of satisfaction. It is known as consumer
surplus.

When the supply price is less than the price actually received, most producers under most
circumstances receive some surplus of revenue. It is known as producer surplus.

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