Consumer and Producer Surplus After a Demand Increase
Shows how consumer surplus and producer surplus both expand when demand shifts right. The new equilibrium is at a higher price and a higher quantity, with the enlarged consumer surplus shaded above the price and the enlarged producer surplus below it.
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This diagram shows what happens to consumer and producer surplus when demand increases. The demand curve shifts right, raising both the equilibrium price and the equilibrium quantity. Consumer surplus is the area between the demand curve and the price consumers actually pay; producer surplus is the area between the price producers receive and the supply curve. Both areas are larger at the new equilibrium, so total welfare rises. Producer surplus rises for two reasons: more units are sold, and a higher price is received on every unit.
Key points
- The demand curve shifts right from D1 to D2, following a change in a condition of demand such as higher incomes or a rise in the price of a substitute.
- Equilibrium price rises and equilibrium quantity rises.
- Consumer surplus is the area between the demand curve and the price paid. Producer surplus is the area between the price received and the supply curve.
- Both areas are larger at the new equilibrium, so total welfare rises.
- Producer surplus rises on two counts: more units are sold, and a higher price is received on every unit.
Exam tip
Mark the original and new equilibrium on the diagram before shading anything. The two surplus areas can only be read correctly once both price levels and both quantities are labelled.
Common mistakes
The commonest error is confusing this with a market surplus. A market surplus means excess supply at a price above equilibrium, whereas consumer and producer surplus measure welfare; the two are unrelated concepts that happen to share a word. Students also measure consumer surplus against the original demand curve after the shift, when it should be read from the new one, and some assume producer surplus falls because the price has risen, when in fact a higher price raises it.
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