How is Economic Surplus defined?

Economic surplus is defined as the sum of consumer surplus and producer surplus. Consumer surplus refers to the difference between what consumers are willing to pay for a good or service and what they actually pay, reflecting the benefit consumers derive from purchasing at a lower price. Producer surplus, on the other hand, is the difference between the amount producers receive for selling a good or service and the minimum they would accept to cover their costs, which indicates the benefit producers gain from selling at a higher price than their minimum acceptable price.

When both consumer surplus and producer surplus are combined, they represent the total economic benefit provided by a market to both consumers and producers. This total economic surplus is crucial for understanding how well resources are being allocated in an economy and helps in evaluating the efficiency of markets. Thus, summing consumer and producer surplus gives a comprehensive view of the overall welfare generated in the market transaction, which is why this definition is key in economic analysis.