Consumer & Producer Surplus
The gains from trade made visible: willingness to pay above price, and price above cost.
The Consumer & Producer Surplus model, in writing
Definition
The gains from trade made visible: consumer surplus is what buyers would have paid minus what they did pay; producer surplus is price minus what sellers would have accepted.
CS = area below demand, above price ; PS = area above supply, below price
The intuition
Every trade between someone who values a good more than it costs to make creates value out of thin air, and surplus measures exactly how much. Competitive equilibrium maximizes the total; taxes, price ceilings, and monopolies all shrink the pie, and the shrinkage (deadweight loss) is a triangle you can point to.
Exam tip
After any policy question, account for all four pieces: CS, PS, government revenue, and deadweight loss. Marks are usually attached to the DWL triangle and who bears the burden.
Related models in Micro Foundations