Consumer and producer surplus a more realistic approach.

The terms “consumer and producer surplus” can be easily explained graphically, but these terms cannot be explained to a simple person.

Consumer surplus is the area between the demand curve and the market clearing price or to be simple, consumer surplus is the area below demand curve and above equilibrium price and on the other hand, producer surplus is the area above supply curve and below market clearing price.

The definitions are perplexing because how can we explain consumer or producer surplus if, for example, I go to market and buy an iPhone for a certain price or any supplier sells an iPhone at a certain price.

Take an example to know well about what are producer and consumer surplus are. I go to market with $600 in my wallet, and expect that I can buy an iPhone with this amount. I reached the shop and surprisingly, I was able to buy iPhone for $550. Now the point is, I was anticipating to buy iPhone for $600 but I bought if for $550: $50 was my benefit. This amount is mostly considered as consumer surplus but according to most of the economists, the utility a seller can attain from these $50 is consumer surplus.

If we consider producer perspective, let suppose a producer of a laptop want to sell a laptop for $700 and this is his anticipated selling price. But a costumer comes and buy the laptop for $800. Like consumer surplus, here seller is in benefit. That’s $100 is his profit. This amount is called producer surplus and meanwhile, majority of economists consider the net benefit achieved from this amount is called producer surplus.

Eventually, consumer surplus is all about the utility obtained from the extra amount and producer surplus is the net benefit achieved from the amount he got extra from the buyer.