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How to Calculate Consumer and Producer Surplus from a Graph: No government intervention: As discussed in the text, consumer surplus is the area below the demand curve and above price. If there are no government interventions, this area will be a triangle. Consumer surplus can be calculated numerically by simply calculating the area of that triangle. Let’s consider an example from the text on page 158. In this example equilibrium price and quantity are both 5, so we have a triangle of height 5 and base 5 as you can see in the diagram below (shaded green). Remembering that the area of a triangle is ½ base times height, we multiply 5 times 5 and divide by 2 giving us 12.5 as the consumer surplus. 10 9 8 7 6 5 4 3 2 1 0 Supply 5 5 5 Demand 0 1 2 3 4 5 6 7 8 9 10 Producer surplus is the area above the supply curve and below equilibrium price. Again, if there are no government interventions, this area will be a triangle. We’ve shaded it pink in the above figure. Again, use the formula for the area of a triangle is ½ base times height so producer surplus is ½ X 5 X 5 = 12.5. Price ceilings and price floors: With price ceilings and price floors, it’s a little trickier, but not much. In these cases there will be consumer surplus, producer surplus, and deadweight loss. With a price ceiling some of the producer surplus is transferred to consumer surplus; with a price floor some of the consumer surplus is transferred to producer surplus. The efficiency cost of doing that transfer is the deadweight loss. Let’s go through an example of a price floor. 1. Consumer surplus is the area above the price floor and below the demand curve up to the quantity purchased. In our example, consumers purchase 4 units with a price floor of $6. Consumer surplus is the green triangle in the figure below. Its height is the price at which demand curve intersects the price axis less the price floor. Its base is the quantity purchased. So, consumer surplus is ½ base times height, or ½ (4 X 4) = 8. 2. Producer surplus is just a little more complicated. It is the area below price ($6) up to quantity purchased (4) and above the supply curve. To calculate this area, divide it into two areas – a rectangle and a triangle. Producer surplus is the sum of these two areas. (a) The area of the rectangle is base times height. Its base is the quantity purchased at the price floor (4). Its height is the difference between producer and consumer surplus at the quantity purchased. Visually you can find the height by dropping a vertical line from the demand curve at quantity purchased to the supply curve. The price floor less the price at which this line intersects the supply curve is the height of the rectangle (2). So, the area of this rectangle is 2 X 4 = 8. (b) The remaining part of producer surplus is a triangle bounded by the horizontal line drawn from the price found in the previous step to the price axis and the supply curve. It’s the light pink triangle below. Its base is the quantity purchased at the price floor (4) and its height is the difference between the price where the quantity purchased intersects the supply curve and the price where the supply curve intersects the price axis (4). The area of the triangle is ½ base X height, or ½ (4 X 4) = 8 Add these two areas (a) and (b) to find total producer surplus (8 + 8 = 16). (If we had done a price ceiling of $4, the rectangle would have gone to the consumer rather than the producer.) 10 9 8 7 6 5 4 3 2 1 0 Supply 4 4 2 4 4 0 1 Demand 2 3 4 5 6 7 8 9 10 3. Deadweight loss. Deadweight loss is the loss of consumer and producer surplus from the government intervention. You can calculate it in two ways. One way is to subtract the total consumer and producer surplus with the price floor (8 + 16) from the consumer and producer surplus without government intervention (12.5 + 12.5). This would equal 25 – 24 = 1. A second way is to calculate the area of the triangle that represents deadweight loss (it’s the gray triangle in the example above). The base is the vertical distance between the supply and demand curves at the quantity purchased (2) and its height is the difference between quantity with and without the price floor (1). Therefore deadweight loss is ½ (2 X 1) = 1.