Welfare Surplus

Surplus is defined as the extra benefit to society that a given good’s price gives to society. This can be split into producer and consumer surplus where producer surplus would be the extra profit they generate per good from a certain price level whilst consumer surplus is the utility provided by a product for its price level.

Consumer Surplus:

The demand curve shows the value a consumer finds a good at a given price level meaning that above equilibrium, there are consumers who value the product higher than its market price. Therefore, this provides utility to these customers as additional benefit, the sum of all the additional benefit is known as consumer surplus.

Producer Surplus:

The supply curve shows the quantity of product a firm is willing to supply based on the price level and it is increasing because of the law of supply. Although, the firm can sell the good at production cost, market forces will shift the supply along the supply line until it reached equilibrium. As a result, the firm will be producing profit from the higher price from each price level below it. Therefore, the sum of all the area above the supply line is known as producer surplus.

Total Surplus:

Total surplus is the sum of the consumer and producer surplus and it represents the…