Definition of Consumer Surplus : Consumer surplus is the difference between the market price and the maximum price that the consumers are willing to pay for a particular product.
Definition of Producer Surplus : Producer Surplus is the difference between the market price and the minimum price that the sellers or producers are willing to sell for a product.
Now let’s see the following question. For each consumer their maximum willingness to pay for Sweetbrand cheesecakes are given in the table.
As mentioned earlier Consumer surplus (CS) is the difference between buyer’s maximum willingness to buy and the market price. So for Sam, consumer surplus: 17.99 – 12.5 = 5.49. For Frodo, consumer surplus: 11.65 -12.5 = -0.85. Hence, no Consumer surplus for him. Similarly for Mary, CS : 12.99 -12.5 = 0.49 and for Pippin, CS: 16.75-12.99 = 3.76. So maximum Consumer Surplus goes to Sam. No buyer will pay any price more than his maximum willingness to buy i.e. his maximum bid. So if the market price is greater than his maximum bid there will be no transaction/trade. Similarly no producer will sell at a price which is lesser than his minimum willingness to sell price. Otherwise he will have to incur loss.
Gains of trade = Consumer Surplus +Producer Surplus. Consumer surplus and producer surplus both can be calculated using the area of triangle formula. Total Producer Surplus is the area above the Supply Curve and below the market price. Similarly, Consumer Surplus is the area below the demand curve and above the market price. So basically CS is the upper triangle and PS is the lower triangle.
Formula for Consumer Surplus = ½ * base *height.
So, Consumer Surplus = ½*100*(25 – 15 )=500
Formula for Producer Surplus = ½ * base*height
So Producer Surplus =½ * 100*(15-5) =500
So total gains from trade = 500+500 =1000.
Consumer surplus = ½*4000*(50-20)= 2000*30=60000. Applied same formula of ½*base*height. At price = $20 ; quantity is 4000 units and hence, that is the base. Height will be 50-20= 30. Because $50 is the maximum willingness to pay and 20 is your final equilibrium price.