Consumer and Producer Surpluses, Gains of Trade and the Benefits of Unregulated Markets - Essay Example

Economic surplus remains a critical component of the economic theory with much focus being devoted to the study of both consumer and producer surpluses. Consumer surplus is the amount gained by a consumer from a purchase by the difference between the price he would have been willing to pay for and the price he actually pays for. For example, a consumer who is willing to pay $18 for a good but pays only $3 gains a consumer surplus of $7 in the transaction.

Analogous to the above-described concept is producer surplus, which is the revenue, received by the producer over and above the amount required to induce them to supply the goods, (Cledires, 2008). Feenstra (2006) notes that, in most cases, this refers to a producer’s total variable cost which is the total sum of the marginal cost of producing each successive unit of output. Krugman (1987) affirms that both the producer and the consumer surpluses can be derived from the market demand curve.

Hence analyzing the demand curve, suppose the maximum price at which consumers will buy X units of goods is $Y, then the Xth unit of the good purchased must be worth $Y to the consumer. The size of consumer surplus is affected by the market price hence a decrease in the price leads to an increase in the quantity purchased hence a larger consumer purchase. In contrast, with higher market prices, the number of goods purchased will be reduced leading to a decrease in consumer surplus, (Levinsohn, 2000).

Gains of trade and Economic Surplus Distinct as the net benefits accruing to agents from voluntary trade with each other, Gains of Trade are the total sum of consumer surplus and producer profits. It results from specialization in production from economies of scale, division of labor, and the availability of productive inputs within given economies, (Cledires, 2008). Gains from trade are realized when world prices of a good vary from the price determined by the intersection of domestic demand and domestic supply.