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What is the origin of both consumer surplus and producer surplus?
What is the origin of both consumer surplus and producer surplus?
Expert Solution
The origin of consumer surplus comes from the different willingness to pay and sell for various consumers and producers. This happens because of thing such as income and marginal benefit. For example, a higher income individual might have a higher willingness to pay than the equilibrium price. Likewise, a consumer might get more utility from a good than another consumer. The same consumer will also likely experiencing diminishing marginal utility.
The same observations apply to producers too but costs are the primary concern. Most producers have an upward sloping marginal cost curve which increases their minimum willingness to sell as output increase. Thus, consumer and producer surplus by all factors mentioned that cause willingness to sell/pay to be different than price.
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