5.a. Total Cost and Total Benefit
Total Cost
It is the cost of producing a certain number of units of a good.
Graphically, it can be expressed as the area underneath the supply curve up to the quantity produced. See
Figure 5.a.1 below.
P
Supply
$4
$3
$2
$1
Q
Area 1
2
1
Area 2
3
4
Area 3
Figure 5.a.1: The total cost to produce the first unit of the good is $1 (Area 1). The cost of
producing an additional unit of the good is an additional $2 (Area 2) for a total cost of $3 (Area 1
+Area 2) to produce a total of 2 units. If the producer wanted to producer a third unit, the
additional cost of producing that extra unit would be $3 (Area 3). The total cost of producing 3
units of the good would be Area 1 + Area 2 + Area 3 or $1 + $2 + $3 = $6.
NOTE: The amount that it costs to produce one more unit of a good is known as marginal cost
(each individual area). Hence:
Total Cost = Sum of Marginal Costs.
Total Benefit
It is the maximum amount a consumer would be willing to pay for a certain number of units of a good. It
can also be thought of as the total benefit a consumer gets for a certain amount of a good or the total value
that they place upon that amount.
Graphically, it can be expressed as the area underneath the consumer’s demand curve up to the quantity
purchased. See Figure 5.a.2 below.
P
Area 1
Area 2
$4
$3
Area 3
$2
$1
Demand
1
2
3
Q
4
Figure 5.a.2: To attain one unit of a good, a consumer is willing to pay $4 (Area 1). For an
additional unit the consumer would be willing to pay an additional $3 for that second unit (Area
2) for a total of $7 for the two units (Area 1 + Area 2). For the next additional unit, the consumer
would only be willing to pay $2 in order to obtain that additional third unit (Area 3). Therefore,
the total benefit this consumer receives from consuming 3 units of the good is Area 1 + Area 2 +
Area 3 or $4 + $3 + $2 = $9.
NOTE: The amount that the consumer is willing to pay in order to obtain one more unit is known
as marginal benefit (each individual area). Hence:
Total Benefit = Sum of Marginal Benefits.
Consumer surplus is a measurement of the net benefit a consumer gains from consuming a certain amount
of a good. It can be thought of as the difference between the amount that the consumer was willing to pay
and what he/she actually paid.
Mathematically, it can be conceptualized as the total benefits gained from consuming a certain amount of a
good minus price per unit paid for that good. The price paid per unit of the good is also equal to the
producer’s total revenue (price x quantity). Therefore,
Consumer Surplus = Total Benefit – (Price x Quantity)
Producer surplus is a measurement of the net benefit a producer gains from producing a certain amount of
a good. It can be thought of as the difference between the price that the producer was willing to sell at and
what it actually cost to produce it at.
Mathematically, it can be conceptualized as the total revenue gained from selling a certain amount of a
good minus what it cost to produce it. Therefore,
Producer Surplus = (Price x Quantity) – Total Cost
Graphically, consumer surplus can be expressed as the area between the demand curve and the price paid
up to the quantity purchased, while producer surplus can be expressed as the area between the price and
supply curve up to the quantity purchased. See Figure 5.a.3 below.
P
Supply
$4
Area 1
$2
Area 2
Demand
Q
2
Area 3
4
Figure 5.a.3: Here we have a competitive market where the equilibrium price that producers are
selling at is $2 and consumers want to buy a quantity of 2 units at that price.
Since the quantity purchased is at the point of market equilibrium, consumer surplus is the area
below the demand curve, above the price of $2 and to the left of the quantity 2. This is denoted by
Area 1. The value of this area can be derived by taking ½ the length times the height or
½ (2x2) = 2.
The quantity purchased is also the same as the quantity produced, therefore, producer surplus is
the area below the price of $2, above the supply curve, and to the left of the quantity 2. This is
denoted by Area 2. The value of this area can be derived by taking ½ the length times the height or
½ (2x2) = 2.
Total cost is the area underneath the supply curve up to the quantity purchased. This is denoted by
Area 3. The value of this area can be derived by taking ½ the length times the height or ½ (2x2) =
2.
Total benefit is the area underneath the consumer’s demand curve up to the quantity purchased.
This is denoted by Areas 1, 2, and 3. The value of this area can be derived by taking the
summation of these areas or 2 + 2 +2 =6.