Principles of Microeconomics / Unit 2 MIC 0131 worked example, 60 to 90 seconds
Computing Surplus from Linear Curves
The idea
With straight-line demand and supply, each surplus is a triangle, and a triangle's area is one half of base times height. Consumer surplus has its base along the price line from zero to the equilibrium quantity and its height from the equilibrium price up to the demand curve's vertical intercept. Producer surplus has the same base and its height from the supply curve's intercept up to the equilibrium price. Add the two for social surplus.
In practice
Worked example: demand meets the price axis at fifty dollars and supply meets it at ten, and the market clears at thirty dollars and forty units. Consumer surplus is one half times forty times twenty, which is four hundred dollars. Producer surplus is one half times forty times twenty, also four hundred. Social surplus is eight hundred dollars.
Where people slip
Height is a price gap, base is a quantity. The common slip is to use the whole intercept as the height, which counts the money buyers actually paid as if it were surplus. Surplus is the part above the price for buyers and below it for sellers, never the rectangle of spending in between.
Your place on the trail
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