What the two surpluses measure, where they are on the diagram, how to calculate them, and how they change when demand or supply shifts. Through the Oasis ticket sale.
When Oasis tickets for the 2025 reunion tour went on sale in August 2024, Ticketmaster used dynamic pricing: prices rose as demand surged. Some standing tickets fans expected to cost £148 sold for £355. The Competition and Markets Authority opened an investigation, and the band dropped dynamic pricing for its North American dates.
Fans who would have paid £355 still bought. So what did dynamic pricing take from them?
Sources: Associated Press and Pollstar (September 2024); CMA (5 September 2024).
Consumer surplus is the difference between what consumers are willing to pay and what they actually pay. On a diagram it is the area below the demand curve and above the price.
Producer surplus is the difference between the price producers receive and the lowest price they would have accepted. It is the area above the supply curve and below the price.
Why the demand curve measures willingness to pay: each extra unit gives a little less extra satisfaction than the last (diminishing marginal utility), so buyers will pay less for each extra unit. The demand curve is a marginal benefit curve.
You would happily pay £20 for a ticket. It costs £12.
You buy it.
What is the £8 difference called?
Consumer surplus is the difference between what you were willing to pay and what you actually paid. Add it up across every buyer and it is the area between the demand curve and the price.
The market clears at £8, with 12 thousand sold.
Read up from the quantity axis to the demand curve to see what each buyer would pay. The 3,000th buyer would pay £17 but pays only £8. The 9,000th would pay £11. Everyone pays the same £8, so everyone up to the 12,000th gains something.
Check: The 3,000th buyer would pay £17 and pays £8. What is their consumer surplus?
Willing to pay £17, actually pays £8: £17 − £8 = £9 of surplus.
Add up all those gains and you get the triangle between demand and the price: consumer surplus. Its area is ½ × base × height = ½ × 12 thousand × (£20 − £8) = £72 thousand.
Check: Supply meets the price axis at £2. The price is £8 and 12 thousand are sold. What is producer surplus?
Producer surplus is the triangle above supply and below the price: ½ × 12 thousand × (£8 − £2) = £36 thousand.
Producers too. Supply shows the lowest price each unit would be supplied for. All but the last unit sell for more than that. Producer surplus is the triangle between the price and supply: ½ × 12 thousand × (£8 − £2) = £36 thousand. Together, the two surpluses are the total welfare from this market.
When demand increases, from D to D2, price rises to £10 and quantity to 16 thousand. Both surpluses grow: consumer surplus to £128 thousand and producer surplus to ½ × 16 × (£10 − £2) = £64 thousand. More trades, and more value from each.
Check: Demand rises to D2. The new price is £10 and 16 thousand are sold. What is the new consumer surplus? (D2 meets the price axis at £26.)
½ × 16 × (£26 − £10) = £128 thousand.
Now suppose supply increases instead.
Check: Supply increases and demand does not change. What happens to consumer surplus?
The lower price widens the gap between willingness to pay and price on every unit already bought, and the extra units bought add surplus too.
The rules for shifts: anything that raises quantity traded tends to raise total surplus. A rise in demand raises both surpluses. A rise in supply lowers the price, so consumer surplus definitely rises. Back to Oasis: dynamic pricing raised the price paid by each fan towards what they were willing to pay, turning consumer surplus into revenue for the sellers.
They shaded the area above supply and below the price: that is producer surplus. Consumer surplus is above the price and below demand.
Explain, using a diagram, what happens to consumer and producer surplus when demand for a good increases.
Consumer surplus is the difference between what consumers are willing to pay and what they actually pay: the area below the demand curve and above the price. Producer surplus is the difference between the price producers receive and the lowest price they would accept: the area above the supply curve and below the price.
[Diagram: D, D2 and S. Equilibrium moves from £8 and 12 to £10 and 16. CS and PS triangles shaded at both equilibria.]
An increase in demand shifts demand from D to D2. Price rises from P1 to P2 and quantity from Q1 to Q2. Producer surplus rises because producers sell more units at a higher price, so the triangle above supply and below the new price is bigger.
Consumer surplus also rises here. Buyers pay more, but there are more of them and they value the good more, so the triangle below D2 and above the new price is larger than before.
Oasis tickets: Associated Press and Pollstar (September 2024); CMA (September 2024). Diagrams drawn with Rough.js and perfect-freehand, both MIT licensed. Your answers are saved only on this device.