Economic Value
What is something worth? Can we determine objective value from any observable facts. GDP measures P x Q, where P is the price of a good and Q is the number of goods. We know each of those transactions makes both parties better off, or otherwise they would not voluntarily trade. Is there any way to know exactly how much better off? Unfortunately, no, because a person takes an action if they have no better alternatives to that action. We do not know their other alternatives, nor their subjective value of those alternatives, so we don't know how much they gained because of the trade. Consumer surplus is shown in the supply and demand graph as the triangle between equilibrium price and the demand curve.
Consumer Surplus is the summation of each individual's willingness to pay and the equilibrium price for all people who buy the good. It shows the gains to society from having the good shown in the supply and demand graph. Producer Surplus is the amount producers gain by being able to sell their product, compared to what they could have sold using the scarce resources to produce the next best good. It is shown below:
Both consumer and producer surpluses show opportunity costs, not subjective value. It is useful because it shows how much of a cost can be imposed on someone before they change their behavior. For example, if my consumer surplus is $5, I can be charged a $4 tax and I will still purchase the good. If the tax is $6, I will not. Consumer and producer surpluses are a core idea of economics.
Consumer Surplus is the summation of each individual's willingness to pay and the equilibrium price for all people who buy the good. It shows the gains to society from having the good shown in the supply and demand graph. Producer Surplus is the amount producers gain by being able to sell their product, compared to what they could have sold using the scarce resources to produce the next best good. It is shown below:
Both consumer and producer surpluses show opportunity costs, not subjective value. It is useful because it shows how much of a cost can be imposed on someone before they change their behavior. For example, if my consumer surplus is $5, I can be charged a $4 tax and I will still purchase the good. If the tax is $6, I will not. Consumer and producer surpluses are a core idea of economics.