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Definition

Social surplus

The sum of consumer surplus and producer surplus. Maximised in the free market, when the market operates at its equilibrium point.

Social surplus is important since it considers not just producers and consumers individually, but them together as a society.

The above figure shows a market for a good (or service). The social surplus is the combined area of the consumer and producer surplus.

Example

Calculating the social surplus under market equilibrium

Consumer Surplus

In the figure, consumer surplus is represented by the area above the equilibrium price ($P_e$) and below the demand curve (D).
It highlights the additional value consumers derive from purchasing goods at a price lower than their willingness to pay.

Producer Surplus

This is shown by the area below the equilibrium price ($P_e$) and above the supply curve (S).
It represents the benefit producers gain by selling goods at a price higher than their minimum acceptable price.

Social Surplus

The total shaded area in the diagram (both the consumer surplus and the producer surplus) illustrates the social surplus.
It is the sum of these two areas, combining consumer and producer benefits.

Calculation of social surplus

Social surplus is the sum of consumer surplus and producer surplus:

$$\text{Social surplus}=\text{CS} + \text{PS}$$

Consumer Surplus (CS) Calculation:

It is calculated as the area of a triangle:

$$\text{CS} = \\ \frac{1}{2} \times (\text{Base of Triangle}) \times (\text{Height of Triangle})$$

The base corresponds to the quantity traded at equilibrium ($Q_e$).
The height corresponds to the difference between the highest price consumers are willing to pay (intersection of demand curve with price axis) and the equilibrium price ($P_e$).

Producer Surplus (PS) Calculation:

Similarly, the producer surplus is calculated as the area of a triangle:

$$\text{PS}=\\ \frac{1}{2} \times \text{Base of Triangle} \times \text{Height of Triangle}$$

The base is again the quantity traded at equilibrium ($Q_e$).
The height is the difference between the equilibrium price ($P_e$) and the lowest price producers are willing to accept (intersection of supply curve with price axis).

Total social surplus

Adding the consumer surplus and producer surplus provides the total social surplus, which represents the total net benefit to society from the production and consumption of the good at equilibrium.
Therefore: $\text{Social surplus}=\text{CS} + \text{PS}$

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Note

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Hint

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Introduction to Social Surplus

Social surplus is the total benefit that both consumers and producers receive from participating in a market.
It is the sum of two key components: consumer surplus and producer surplus.
Social surplus is maximized at the market's equilibrium point, where supply equals demand.

DefinitionSocial SurplusThe sum of consumer surplus and producer surplus, representing the total net benefit to society from market transactions.

AnalogyThink of social surplus as a pie that represents all the benefits from a market. The pie is divided into two slices: one for consumers and one for producers. At equilibrium, the pie is at its largest size.

Common MistakeStudents often forget that social surplus includes both consumer and producer surplus. Always remember to consider both parts!

2.3.5 Social/community surplus Notes