Here's a question.

Suppose there is a winter

with hardly any snow.

Who is hurt; ski resorts or skiers?

Turns out we can answer that question

using consumer and producer surplus.

Start with consumers.

We're used to thinking of the demand curve

as the answer to the question

how many items will consumers buy

if this is the price.

We can also think of it

the other way around.

How much are consumers willing to pay

for this item,

what consumers are willing to pay,

and what they have to pay

don't have to be the same thing.

Suppose I'm really hungry

and I'm willing to pay $10 for a Burrito

but say that I can buy one

at a market price of $6.

So being able to buy a Burrito

that I've value at $10 for only $6

gives me a net benefit of $4.

It makes me just as happy

as if a stranger randomly walked up to me

and gave me $4.

In our graph

that net benefit shows up

as the gap between the demand curve,

the value or the benefit to the consumer,

and the price.

We're interested in adding up

all of those net benefits

for all of the Burrito eaters in the market.

That total net benefit

is a dollar amount

called consumer surplus.

It's the total benefit to all consumers

from being able to buy Burritos

for less than they're willing to pay.

On our graph it shows up

as the triangle between the demand curve,

the value to the consumers,

and the price that they actually have to pay,

and if the demand curve is a straight line

you can calculate that consumer surplus

just like you found the area of a triangle

in middle school.

One half the base times the height.

Now let's look at producers.

We're used to thinking about the supply curve

as the answer to the question.

If this is the price

how much will producers supply,

but we can also think about it

the other way around.

How much did it cost the producer

to make this item.

Suppose that the Burrito place spent

$3 in labor and ingredient costs

to make that Burrito that I wanted.

It was able to sell it to me

for the market price of $6.

So the burrito place enjoyed

a net benefit of $3.

On our graph

that net benefit shows up

between the market price

that the Burrito place receives

and their cost of producing the Burrito

which is the supply curve.

Now you may think

that means the Burrito place

made $3 profit on the Burrito.

That's actually not quite the same thing

because here we're looking at marginal costs

and to compute profit

you compare price and average costs

but obviously the two concepts

are closely related.

Like we did for the consumers

we want to add up all of the net benefits

for all of the Burrito producers

in the market.

That total net benefit is a dollar amount

called producer surplus.

It's the total benefit to producers

from being able to sell Burritos

for more than they cost to make.

On our graph it shows up

as the triangle

between the market price and the supply curve,

and again

if the supply curve is a straight line

you can calculate that producer surplus

with the area of a triangle;

one-half base times height.

Think about that Burrito I bought

for one more minute.

I was willing to pay $10 for it.

I valued it at $10.

It costs the producer $3 to make it

that means that society is $7 better off

because that Burrito

was produced and consumed.

I split that net benefit

with the Burrito place.

Since the market price was $6

I got $4 of the net benefit

and the Burrito place got three.

Now back to our skiers and ski resorts.

Say that there's plenty of snow.

The market looks like this.

Skiers benefit

because they can purchase ski runs

for less than they're willing to pay.

That's the consumer surplus

and ski resorts benefit

because they can sell ski runs

for more than they cost to supply.

That's the producer surplus,

but suppose that there's a really warm winter

without any snow.

That will limit the quantity of ski runs

that can be supplied and consumed.

That shows up on our graph like this.

Who is hurt?

Anyone who loses their net benefits

and we can see that

both ski and skiers lose out.

There were more ski runs

that the skiers valued at more than the price

but they weren't able to buy them.

There were more ski runs

that the resort's could sell

for more than the cost of providing them

but they weren't able to produce them.

These losses show up

as reduced consumer surplus for the skiers

and reduced producer surplus for the resorts.